Next housing crisis and appraisals

next housing crisisAre government agencies setting up the next housing crisis?  A November 20th proposal from the FDIC, the Fed, and the Office of the Comptroller of the Currency, has some consumer advocates suggesting just that.  The joint proposal from these agencies would have the threshold for a (1-4 unit) residential mortgage appraisal increased from $250,000 to $400,000.  This means that an appraisal would not be necessary for homes valued less than $400,000.  However, this rule would not apply to mortgages insured or guaranteed by federal agencies, such as FHA or VA mortgages.

Contrary to causing the next housing crisis, the rationale given for the appraisal rule change is to reduce mortgage processing delays.  The change is also supposed to reduce costs to both financial institutions and consumers.  The proposal states:

The agencies believe that the proposed increase to the appraisal threshold for residential real estate transactions would reduce burden in a manner that is consistent with federal public policy interests in real estate-related transactions and the safety and soundness of regulated institutions.”

However, the Appraisal Institute (appraisalinstitute.org) is in strong disagreement.  AI president James L. Murrett, MAI, SRA stated in a press release that the rule change could potentially harm consumers by undermining “crucial risk mitigation services.”  Murrett commented,

The Appraisal Institute anticipates that [the increase] will result in a return to the loan production-driven environment seen during the leadup 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 Appraisal Institute is not alone in rejecting the rule change for residential mortgages, as opposition is being voiced from various consumer organizations.  But the proposal should not have been a surprise.  Changing the appraisal thresholds, which has not been adjusted since 1994, has been in the works for several years.  And rumor of an imminent rule change was reported in January by Patrick Rucker for Reuters (U.S. regulators ready to ease check on property values: sources; Reuters.com; January 28, 2018).  Mortgage Bankers Association supported a threshold increase because of appraiser shortages, especially in rural areas.  However, consumer advocates are concerned of triggering a new housing crisis because improperly inflated home values contributed to the last crisis.

Interestingly, although this appraisal rule was considered earlier this year, a threshold change was only made for commercial mortgages.  The final rule dated April 9th raised the threshold for commercial appraisals from $250,000 to $500,000.

Some industry associations, such as the National Association of Realtors, have yet to comment on the recent proposal to increase the residential appraisal threshold.  However, the NAR did issue a statement April 5th supporting the commercial appraisal threshold increase.

Curiously, NAR’s recent support for increasing the commercial appraisal threshold is counter to their 2016 statement in favor of maintaining a $250,000 threshold.  The 2016 letter sent to the Federal Financial Institutions Examination Council stated:

“NAR believes increasing the appraisal threshold levels would undermine the health of the real estate lending industry as a whole. As NAR states in its Responsible Valuation Policy, a trustworthy valuation of real property ensures the real property value is sufficient to collateralize the mortgage, protect the mortgagor, allow secondary markets to have confidence in the mortgage products and mortgage backed securities, and build public trust in the real estate profession.

It remains to be seen if NAR’s position on “building trust in the real estate profession” will completely change to also support an increased residential appraisal threshold.  Or if not requiring appraisals for homes under $400,000 will cause the next housing crisis.

Original published at https://dankrell.com

Copyright© Dan Krell
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