A joint proposal by three federal agencies released Nov. 20 could speed up an estimated 40 percent of residential real estate transactions in the U.S. by changing requirements surrounding appraisals.
Under the proposed rules, certain residential real estate transactions valued at less than $400,000 would not require a certified home appraisal before receiving regulatory approval. Currently, that appraisal threshold stands at $250,000.
According to a news release from the Office of the Comptroller of the Currency, which is spearheading the proposed change, this would mark the first time since 1994 that the appraisal threshold for non-government-backed loans has been changed, and “responds to concerns raised by financial institutions about the time and cost associated with completing residential real estate transactions.” The Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC) also support the change.
Under current federal regulations, most mortgage lenders must obtain an appraisal of a home’s fair market value from a licensed appraiser before closing the loan. This appraisal is usually part of the buyer’s closing costs. However, appraisals take time to schedule and can complicate the transaction if they come in significantly higher or lower than the list price.
Government-sponsored loan programs — like FHA loans, VA loans or those backed by Fannie Mae or Freddie Mac — follow their own appraisal requirements and thus would not be subject to the proposed change.
Regardless, the FDIC estimated that 56 percent of all home transactions in 2017 (approximately 750,000) were exempt from the full appraisal requirement. Raising the price threshold as proposed would have exempted an additional 16 percent, or around 214,000 sales in 2017.
Rather than requiring an appraisal from a licensed real estate appraiser for transactions valued under $400,000, the federal agencies suggest amending the rule to require instead that the financial institution underwriting the loan in question “obtain an evaluation consistent with safe and sound banking practices.”
While the proposal was created in collaboration with representatives from the financial industry, according to the OCC, some real estate appraisers themselves are opposed to the idea. Critics include The Appraisal Institute (AI), an 18,000-member trade organization that advocates on behalf of the real estate appraisal industry.
“By increasing the residential appraisal threshold from $250,000 to $400,000, FDIC would threaten the vital role that appraisers play in real estate transactions,” AI president James L. Murrett said in a press statement in response to the federal proposal. “This action would undermine the crucial risk mitigation services that appraisers provide clients and users of appraisal services.”
Murrett added that such a loosening of home appraisal rules could “result in a return to the loan production-driven environment seen during the lead-up to the financial crisis, where appraisal and risk management were thrust aside to make more – not better – loans. Apparently, the FDIC has learned nothing from that experience.”
The proposed rule change will only become final if it is approved by federal regulators following a mandatory 60-day public comment period.