Scotsman Guide > Residential > February 2019 > Department

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Residential Department: Backspace: February 2019

 

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Federal regulators issued a proposal this past November that calls for eliminating mandatory appraisals on some home sales of $400,000 or less. The current value threshold of $250,000 has been in place since 1994.

Mortgage originators who work exclusively with conventional loans or government-backed loans aren’t directly impacted by the regulatory proposal, but it could affect them indirectly if competing lenders take on more portfolio loans to capitalize on the new rules.

If adopted, the rules would essentially apply only to home mortgages of $400,000 or less that a lender is willing to keep on its books. The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, as well as the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA), are exempt and would continue to set their own rules around appraisal requirements.

The number of licensed appraisers in the U.S. declined by 35 percent from 2012 to 2017, and federal legislation adopted in May 2018 reduced the potential workload of those still in the field. Smaller lenders may now waive appraisals for home sales of $400,000 or less if they cannot get an appraisal in a timely manner, and the appraisal-requirement threshold doubled to $500,000 for commercial real estate transactions.

The appraisal industry, however, is concerned about the recent proposed rule changes, which could go into effect sometime after the regulators’ public-comment period ends on Feb. 5. Those newly proposed rules would expand the exemption adopted this past May by allowing any lender to waive appraisals on home sales valued at $400,000 or less — so long as the mortgage is retained in the lender’s loan portfolio.

Potential appraiser job losses aside, a big concern for the industry is that further erosion of appraisal standards threatens to raise the level of risk for lenders, says Jim Murrett, president of the Appraisal Institute. “The argument given is, well, it saves time and it saves money,” Murrett says. “Nowhere in the conversation does it say that the appraisals serve the risk-mitigation function, which is a safety and soundness issue.”

Rick Bettencourt, president of the National Association of Mortgage Brokers, says his organization has not taken an official stance on the proposed change. Because the rules are not changing for conventional or government-backed loans, “it’s not going to affect the lending world in which we operate,” he says.

Bettencourt believes, however, that appraisals serve a necessary and useful function within the loan origination process. Additionally, he says the argument that waiving appraisals reduces costs and shortens the loan-closing period for borrowers doesn’t hold water.

Literally, it is a race to the bottom to see who can loosen their under- writing standards to out-compete each other.
- Jim Murrett
President, Appraisal Institute

“Right now, we have thousands of mortgage brokers with appraisal requirements that are getting loans closed in 15 to 18 days,” he says. “I mean, how fast do people want to close a loan? … Do we want to be able to close loans in 48 hours? I think that’s a bit excessive. There needs to be a series of checks and balances throughout the entire process.”

Ron Haynie, senior vice president of mortgage finance policy for the Independent Community Bankers of America, says U.S. median home values no longer support the $250,000 appraisal threshold that is now 25 years old. According to the U.S. Census Bureau, the nation’s median sales price for a new home has increased from $126,000 in 1994 to $309,700 as of this past October.

Haynie also points out that even if the new appraisal rules are adopted, lenders will still need to complete a property evaluation that is, as regulators phrase it, “consistent with safe and sound banking practices.” These evaluations include interior and exterior inspections of the home, as well as an analysis of sales data of comparable properties within the same area to establish market value. And the people conducting the evaluations, in many cases, are formerly licensed or certified appraisers, Haynie says.

“The difference is the bank does not have to go outside and get a licensed, certified appraiser to complete an appraisal,” he says. “These are people that are going to be employed by the lender themselves. … The regulators are pretty careful and pretty specific about a lot of things that need to be in this evaluation, so it’s not like you drive by, take a picture of the house and it looks OK. They need to do some work on it.”

There is a larger trend of moving away from certified appraisals, however. In 2017, the GSEs adopted waivers for a larger number of transactions. Today, Fannie Mae and Freddie Mac will issue waivers for single-family home and condominium purchases if they have a recent appraisal on file and the borrower has made a downpayment of at least 20 percent. Murrett is concerned that the waivers may now cover up to 12 percent of GSE transactions.

“Their argument is, we have a database of appraisals that supports the value,” he says. “Well, that database is going to get stale pretty quick, if you don’t get appraisals on new transactions.

“The situation with those two entities is that they compete with each other. Literally, it is a race to the bottom to see who can loosen their underwriting standards to out-compete each other.”

In rural areas, Haynie says there are simply fewer appraisers to work with smaller populations. And appraisers seem to be retiring more quickly than their replacements can be found, exacerbating the tight-supply issue. Haynie believes the proposal at hand will help community lenders without increasing the risk.

“You’ve got to remember that the banks lending, they’re on the hook for 100 percent of the credit risk on this loan [if it’s retained in their portfolio], so they’re going to be careful,” he says. “They’re not just going to do this to sort of check the box. They’re pretty careful about making sure the collateral supports the loan request.”

Based on 2017 transaction volumes, federal regulators estimate that increasing the appraisal threshold to $400,000 would exempt an additional 214,000 mortgages annually. That equates to 3 percent of loans covered by the Home Mortgage Disclosure Act and 16 percent of home loans issued by federally insured lenders.

And Bettencourt doesn’t believe the appraisal-rule shifts will make their way into the government-loan sphere anytime soon. “I don’t think you’ll ever see appraisals being waived or exempted for FHA, VA or USDA [loans],” he says. 


 

Neil Pierson is editor in chief of Scotsman Guide Media. Reach him at neilp@scotsmanguide.com or (800) 297-6061.

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