Compliance & Regulation
A proposal allowing more lenders to skip outside appraisals could remove a hurdle to quick closings, but appraisers say they could be collateral damage.
In reg relief era, appraisers become endangered species
Recent steps allowing more lenders to skip outside appraisals are seen as removing a key hurdle to closings, but appraisers say they could be collateral damage from the deregulatory policies.
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency released a proposal in November to raise the threshold for residential real estate transactions that require an appraisal from $ 250,000 to $ 400,000. Lenders would still be required to obtain an evaluation for sales under the $ 400,000 limit, which the agencies say would “reduce burden in a manner that is consistent with federal public policy interests.”
But appraisers are raising concern that the proposal would not only hurt their business, but also leave consumers with a less viable method for verifying home values. Evaluations don’t adhere to the rigorous standards that appraisals do, and have become increasingly automated.
“The appraisal is the one aspect of a transaction where the appraiser is the independent, objective and impartial participant in the transaction,” said James Murrett, the president of the Appraisal Institute. “They don’t have a dog in the fight, so to speak, the way that the broker who wants to try and get the deal closed and the banker wants to try and get the loan approved.”
The recent proposal, which the regulators issued under their authority to eliminate outdated or unnecessary rules, follows other policy steps to ease appraisal requirements. In April, regulators finalized a similar change dealing with commercial real estate transactions. And the financial regulatory relief law enacted in May provided relief from appraisal requirements in rural areas.
Banks had long been concerned that appraisal exemptions were not keeping pace with home values. Smaller banks reacted positively to the CRE-related measure, saying it would help them compete with nonbank lenders that are not subject to appraisal requirements.
But whereas appraisers did not object to those earlier steps, they say the latest proposal on residential mortgage transactions could significantly lower the standard on property valuations.
Appraisers must meet strict credential requirements, but almost anyone with knowledge of the real estate market can perform a less rigorous “evaluation,” said Tony Pistilli, the chief property appraiser at Computershare Property Solutions.
Those performing evaluations “have absolutely no risk of being disciplined for improper methodology or even fraud,” he said. “Appraisers would lose their license, so there’s that standard of care that is commensurate with the license that they have, but not in individual preparers.”
The Dodd-Frank Act codified the uniform standards and independence of appraisers following the 2008 financial crisis, and even made it possible for appraisers who violated certain requirements to be prosecuted and fined.
“A huge part of the housing and then economic meltdown in 2008 was impacted by very, very terrible abuses done in the appraisal field — people getting false appraisals and appraisals that were intentionally inflated that gave consumers a false sense of security on what the value of their home was,” said Yana Miles, the senior legislative counsel at the Center for Responsible Lending.
There is some concern among appraisers and consumer advocates that exempting more loans from an appraisal requirement could lead to a down cycle in the housing market that Dodd-Frank sought to avoid.
“The crack of the door is open and as they start to open the door a little bit more and a little bit more, all of a sudden the significant portions of the transactions out there are not going to have the requirement to have an actual physical body looking at the property, which is so important,” said Murrett.
An appraisal exemption like that proposed by the banking agencies would also be much riskier for lenders, said Miles.
“I would think that lenders would want assurances that there’s adequate collateral for the loans that they’re lending,” she said. “That plays a huge role into what you get back as a lender.”