10A — September 14 - 27, 2018 — Appraisal — Financial Digest — M id A tlantic

Real Estate Journal


A ppraisal

Regulations requiring appraisals of real estate for certain transactions Appraisal Threshold

he OCC, Federal Re- serve Board, and FDIC (collectively, the agen- cies) have adopted a final rule to amend the agencies' regula- tions requiring appraisals of real estate for certain transac- tions. The final rule increases the threshold level at or below which appraisals are not re- quired for commercial real es- tate transactions from $250,000 to $500,000. The final rule defines commercial real estate transaction as a real estate- related financial transaction that is not secured by a single 1-to-4 family residential prop- T

erty. It excludes all transactions secured by a single 1-to-4 family residential property, and thus construction loans secured by a single 1-to-4 family residential property are excluded. For com- mercial real estate transactions exempted from the appraisal requirement as a result of the revised threshold, regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking prac- tices. Per the Economic Growth and Regulatory Paperwork Reduction Act the Federal

bank regulatory agencies have been reviewing whether to raise the appraisal threshold levles, which currently stand at $250,000 for real estate loans and $1 million for busi- ness or owner occupied loans. Testimony on September 28th by Federal Reserve Chair Janet Yellin to the House Financial Services Committee signaled the agencies' intentions to pro- pose a reduction in appraisal re- quirements, perhaps before the end of 2016. This would reduce fundamental risk management requirements at a time when the housing market has only re-

cently recovered from the larg- est real estate related financial crisis in several decades, and in the face of alarm bells transmit- ted by the regulators about the commercial real estate market. Background FIRREA, enacted in 1989 in response to the savings and loan crisis, authorized Federal bank regulators to require appraisals for real estate loans made by federally regulated financial institutions. • In 1994, the bank regula- tors exempted wide swaths of loans from appraisal require- ments, including real estate

loans below $250,000 and owner occupied business loans below $1 million. More than 20 years later, a majority of residential real estate loans still do not require an appraisal under the existing exemption. • The recent financial crisis witnessed widespread problems with bank management of ap- praisal requirements, includ- ing adherence with the 1994 regulations. A vast majority of failed banks from the financial crisis were shown to have been cited by federal bank regula- tory agencies for lax appraisal management. • In addition to establishing the two appraisal threshold levels in 1994, the agencies exempted loans sold to Fannie Mae and Freddie Mac. This al- lowance was granted based on a determination by the bank regulatory agencies that the government sponsored entities would maintain equivalent appraisal requirements. Over time, the government sponsored enterprises loosened their ap- praisal requirements. • Ultimately, nearly 1/3 of loans received an “appraisal waiver.” Coupled with poor underwriting and review re- quirements, the policies of the government sponsored enterprises drove them into conservatorship by the federal government. • Since the crisis, the GSEs have required appraisals more often. A 2011 GAO Report found that 85% of mortgages purchased by the GSEs in 2010 were accompanied by ap- praisals. Today, nearly all first purchase mortgages require a full interior inspection ap- praisal completed by a certified appraiser. Concern As independent evidence of the market value of a property, appraisals protect both consum- ers buying homes and taxpayers who stand behind the GSEs and FDIC-insured institutions. Raising the appraisal threshold above $250,000 would under- mine both consumer protection and safety and soundness: • It would increase the odds that a home buyer will wind up “under water” in a house – ow- ing more in mortgage debt than the home is worth. View the National Associa- tion of Realtors letter to FFIEC on the appraisal threshold. www.appraisalinstitute.org/ file.aspx?Document=AI_2014_ comment_letter1.pdf 

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