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Appraisers: Proposed rule change is pound foolish

Last month, banking regulators proposed a change that would eliminate appraisal requirements for many home sales of $400,000 or less. Currently, homes valued at $250,000 or less do not require an appraisal before a mortgage can be issued, a standard that has been in place since 1994.

This past May, Congress established in its Dodd-Frank reform bill (the Economic Growth, Regulatory Relief and Consumer Protection Act) that banks and credit unions could waive appraisals for sales of less than $400,000, but the properties had to be located in rural areas and the waiver could only be applied if certain conditions were first met. The rule change proposed by banking regulators, which is part of a separate process under the Economic Growth and Regulatory Paperwork Reduction Act, would apply far more broadly.  

Jim Murrett, president of the Appraisal Institute, spoke with Scotsman Guide News about the proposed rule change and its potential implications for the mortgage and appraisal industries.

jimmurrett(1)Why are you concerned about this proposed rule change?

Needless to say, the Appraisal Institute is going to be commenting quite strenuously, opposing the big increase [on the threshold for a waiver]. This is kind of like another crack in the door as far as we are concerned, where they are just opening more and more of the areas within the lending industry where appraisal waivers are being imposed. It can easily lead to safety and soundness [concerns], and poor risk-mitigation efforts.

The argument given is, well, it saves time and it saves money. Nowhere in the conversation does it say that the appraisals serve the risk-mitigation function, which is a safety and soundness issue. In the overall costs of a transaction, you are talking [about] an appraisal that can range between $300 to $400 [or up to] $700-$800. You are paying the Realtor 6 percent on a $300,000 transaction. You don’t bat an eye paying the Realtor $18,000 to $20,000. You don’t bat an eye paying the attorney $3,000 to $4,000. You don’t bat an eye for paying title insurance, but we have had reports of appraisers getting calls from lenders asking them to cut their fee by $50 to $75.

How many loans would be affected?

It is not going to affect the loans of Fannie Mae and Freddie Mae. They [the government-sponsored enterprises] are already exempt and they choose to get appraisals for quite a few of their transactions, even though it is concerning that they [GSEs] are increasing their waivers.  

Based on the 2017 [home-loan] volume, you are looking at about 200,000 to 220,000 home mortgages that this is affecting. One could argue that, well, it is not that big of a deal, but I like to use the phrase, "death by a thousand cuts." It is just another area where the one aspect of a real estate transaction that is independent, objective and impartial is constantly being squeezed out of the situation.

It is reportedly difficult to find an appraiser in many areas, particular rural areas. Is that not the argument supporters of this proposal would make?

They are saying that it is hard to find one but, again, I will say, at what price? If you want to find a rural appraiser to travel 100 miles to do an appraisal for you, but you are saying, "I am not going to pay you more than $300 to do it," of course it is going to be hard to find someone. The fact is there are appraisers out there that will cover it, but it naturally is going to take you a little bit longer to find someone who has to travel that distance. Then the question is, "So, if you don’t find an appraiser to do it, who is going to give the lender an indication as to what the value is?" It has been proven that automated valuation models are at their worst on rural properties. There isn’t data there to have an appropriate data set. And so, if it is not an appraiser, do you call a broker? Do you do an automated valuation model? That is just putting a number on a piece of paper that is literally worthless because of the lack of data.

The loans covered under this rule change are essentially bank loans, correct?

You are correct. As I said, based on the statistics from 2017, it would be around 200,000 to 215,000 home mortgages additionally (on an annual basis), and that represents about $64 billion in transactions. So, admittedly, this is not the end of the world in terms of opening up new paths, other than it is another crack in the door. It is a continuum as to everyone trying to increase the appraisal [waiver] threshold.  

The other aspect of this question is, OK, if you don’t do an appraisal by a licensed or certified appraiser, what product are you going to get? The banking regulations do require the development of what is called an evaluation. The argument of the Appraisal Institute on that is that maybe we need to loosen some of the appraisal-standards rules, or state laws on licensing and certification, that allows appraisers to do evaluations. You will find appraisers out there who will do this evaluation product. That is a possible alternative that needs to be evaluated more fully.

The Appraisal Institute has objected to Fannie Mae’s and Freddie Mac’s practices of waiving appraisals on some purchase transactions. Are you worried about that becoming widespread?

That is correct. Fannie and Freddie used to have a waiver program that just dealt with refinances. That was reasonably OK, but it was a very small percentage of their portfolio for very low-risk situations on a refinance. We were OK with that because they had an original appraisal done when the loan originated and they had loan-payment history. They can look at trends in the marketplace to see if there is any mass reduction in values. They could then waive the appraisal for a refinance. However, they have now increased that to include new purchases.

Now you have got new transactions going on where there is no appraisal. Their argument is, we have a database of appraisals that supports the value. Well, that database is going to get stale pretty quick, if you don’t get appraisals on new transactions. Again, they are claiming that it is simply on low-risk transactions. Freddie would not talk about what percentage of loans it would be. Fannie said probably 2 to 3 percent. In reality, it has been around 10 to 12 percent. 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, and these are two GSEs that are in receivership.

You mentioned the Appraisal Institute will be commenting on the proposed rule change. What would you like to see happen?

I think a $250,000 [threshold], that is a very good status quo. We also recognize that the federal regulators can do what they want to do. If they do go to $400,000, let’s then put together in place an alternative product that an appraiser can be involved in. Right now, it is just a total exemption and it is very unclear what the requirement would be for any type of valuation product.  


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