Bank regulators are nearing a decision to raise residential real estate transactions appraisal threshold to $400,000 from $250,000, for certain transactions.
Perhaps it should be set to $2million, or $5million.
It strikes me that we have two separate taxpayer regulatory/administrative/quasi-governmental organizations working in opposition. On one hand we have the Appraisal Subcommittee and The Appraisal Foundation (TAF), and 50+ state organizations attempting to regulate, license, and control the education of appraisers. USPAP, (Uniform Standards of Professional Practice) is promulgated by the Appraisal Standards Board (ASB) of the TAF. USPAP compliance is required for federally related transactions. USPAP comprises two parts:
1) Integrity Standards, (such as ethics, record-keeping, and competency) and;
2) Performance Standards (such as credibility, errors of omission/commission, or careless/negligent work.
On the other hand, we have the OCC, the FRS Board, and the FDIC, proposing to eliminate the requirement for appraisals below these levels. Any valuations could then be performed by individuals not subject to USPAP, performing ‘Evaluations’ (not requiring a state-licensed appraiser). The reasons given for raising the threshold are:
1) Evaluations are generally less expensive than appraisals;
2) Evaluations can be completed faster;
3) Last year there was a “shortage” of appraisers in a couple of states for a while.
So, taxpayers are paying for these opposing intents. One to improve public trust and economic security, the other one to reduce bank or borrower costs (Perhaps as much as $100 – $200 per house.)
To simplify this discussion, let’s note two facts: Appraisers can perform ‘evaluations’, normally using the same scope of work as an unlicensed “evaluator”. What’s the difference? It appears to me that there is one key difference. The question is then: Which part of the service is not required? Is it the integrity/ethics, or the performance (such as using the right data and analysis)?
It appears to me that since unlicensed persons can charge less, have less tax/fee burden (for licensing, education, and errors/omissions insurance— the less ethical, less responsible ‘evaluator’ can always outbid the licensed appraiser every time.
So, what would happen if we simply raise the deminimus threshold to say $2Million? Licensed appraisers could still be used for all levels of work. The only criterion left would be clear: What is the integrity and performance level of the person doing the valuation?
Wow! Only the integrity and good practice? Why, what would happen? Banks would again have to make all collateral loan decisions on the basis of the competence and ethics of the valuer. What a concept!
What a throwback. We would go back to the days before “the great recession”. Banks would have to evaluate the competency, ethics, education, experience, and perhaps even the professional associations and designations (such as the MAI, SRA, ASA, ARA, CRE . . .). What a throwback.
The Mann
January 16, 2019 @ 6:41 am
What I don’t get is why ANYONE thinks this is a big deal. FIRREA affects less than .01% of 1% of residential loans and thus residential appraisals. This is a non-issue. Yes, raise it to $10MM. 99.9% of residential appraisers would not lose a single appraisal assignment. FIRREA has NOTHING to do with retail residential loans….those sold to the secondary market. That is where 95% of the loans and appraisals are. Not even the AI gets it. As they say nowadays, dolt! in our days, duh!
Merv I Conlan
January 17, 2019 @ 11:46 am
FIRREA affects less than .01% of 1% of residential loans
FIRREA has NOTHING to do with retail residential loans (those sold to the secondary market)
might you expand on those remarks?
The Mann
January 17, 2019 @ 1:04 pm
Yes, Merv. FIRREA has 12 exemptions to when an appraisal is required. One is if the loan is going to be sold to say FNMA and Freddie Mac and such. So for all of those residential loans being sold to those agencies FIRREA is not followed. We follow the Freddie or Fannie or VA or such guidelines. The only residential that is affected by FIRREA are model homes, rental homes (me or you own 10 houses around a city that we rent), and vacation homes – essentially loans on the commercial side of banks that happen to have a house or condo here and there as collateral. So, the 95%+ of residential loan appraisals done for the secondary market fall outside of FIRREA. This is a big nothing for appraisers. But, appraisal groups are just playing it up like it is a huge thing….which might be ok in prepping for something Fannie and Freddie might try down the road. Sort of like coaches yelling at refs in hopes of getting a favorable call later in the game. I hope that helps.
Steve
January 18, 2019 @ 12:34 pm
FIRREA applies to all federally regulated institutions. A federally regulated institution is defined as an institution that is supervised by a financial regulatory agency, which includes banks, bank holding companies, non-bank subsidiaries, credit unions, et alia. To be honest, I believe appraisers might fall under the umbrella of a federally regulated financial institution, but that would have to be confirmed. Regardless, residential transactions resulting in the exchange of new money would be required to follow the FIRREA appraisal policy, unless the institution doesn’t have a charter or an exemption can be applied. The GSEs will still require appraisals, but offer appraisal waivers for loans they deem as low risk.
That said, I do agree that this won’t have too much of an impact on the traditional appraisal profession. This change will simply allow institutions the option to use alternative valuation products, as long as they appropriately mitigate risk through the evaluation process. Also, if the GSEs are still requiring appraisals, then primary market participants are likely to align their appraisal policies so the loans they originate/sell will qualify for as many secondary market players as possible, including the GSEs who are still the largest consumer. There was similar clamoring when the limit was increased from $80k to $250k, and I don’t believe that had a significant impact of appraisal volume either.
A question I have for George….How “accurate” does a valuation have to be if the condition of the home is confirmed with a property inspection, the mortgagor profile is very strong, and there is a sizable equity cushion?
Scott Fields
January 17, 2019 @ 7:47 am
Put it back on the lender to hire the appraiser. Now they push it off on a 3rd party whose fees depend on fast cheap and hitting the #s. It was better when the lender had the responsibility. Bad appraisal no tax payer bailout on the defaults.
The Mann
January 23, 2019 @ 8:54 am
Sorry about the delay in replying. Been sick with a bad cold. Agreed all around….minimal affect as this is not being done by the GSEs. I assume your mortgagor question is for Dell. I am not a residential expert. Commercial is my area of expertise and this I concentrate on FIRREA. Hopefully, Dell will reply if he sees this.
Steve
January 23, 2019 @ 12:13 pm
Sorry you’ve been sick, seems to be going around. I know the flu has been very rampant this year.
Yes, the question was intended for George, but whoever wants to comment is fine too. I’m genuinely curious, resi or commercial.