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.

National Mortgage News - - Contents - By Han­nah Lang

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.”

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