The three main agencies that regulate banks and credit unions — the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve (The Feds) — announced on November 20, 2018, that they are proposing a new rule that would eliminate the requirement for an appraisal on loans under $400,000 for certain transactions.
In an effort to streamline mortgage origination and reduce costs to the consumer, Fannie Mae and Freddie Mac (Government-Sponsored Enterprises, or GSEs) have been waiving appraisals for at least two years (also in certain cases.) However, not all loans made in the U.S. are sold to the GSEs; some are held in portfolio by the institutions that make them. Lenders that write loans to be sold to the GSEs follow rules they publish, but institutions (e.g. banks, credit unions) that retain some of their loans have to write those loans to rules developed by the FDIC, the OCC and the Feds.
Appraisals add more cost and time to the transaction than the benefit to the safety of banks and the consumer merits.
These agencies have been examining the same issues — namely, originating a mortgage takes too much time and is too expensive. They too have allowed institutions to waive appraisals on certain loans, since at least the early 1990s. In 1994 the threshold was raised to $250,000, but has remained stuck there ever since.
The idea is that appraisals add more cost and time to the transaction than the benefit to the safety of banks and the consumer merits, particularly in rural areas.
The recent announcement proposes that as long as the loan amount is under $400,000, and certain other criteria are met, an institutional lender may make a loan and waive the requirement for an appraisal. The devil is in the details, since not all loans will qualify.
The lender will still have to conduct an “evaluation consistent with safe and sound banking practices.” This might mean a computerized valuation, a drive-by appraisal or some less expensive alternative.
Transactions that are not sold to Fannie or Freddie are relatively small as a percentage of total loans made in the U.S., but still affect a lot of home buyers and homeowners. According to HousingWire.com, the higher thresholds would have exempted 214,000 mortgage transactions (3 percent of total residential transactions with a mortgage) in 2017 from needing an appraisal.
The regulators are responding to increased costs and the time associated with originating residential mortgage loans. They have been able to watch Fannie and Freddie successfully implement their no-appraisal requirements for a couple of years now with no issues, so they have the data to back up the move. In other words, the question should be, “Why did it take so long?”
How it Works
The proposed change is simply a proposal at this point, to seek industry and public comment. The specific rules on what banks and credit unions must do is not clear yet. The final rule will most likely specify a nationally recognized automated valuation model (similar to Zillow’s Zestimate) and a physical inspection of the property. It may, however, also include options such as a drive-by appraisal or a broker price opinion, provided the broker who provides it is not involved in the transaction.
Would you want there to be an appraisal on a home that you are buying? You might, and you will certainly have the option.
The question is: As a buyer, would this appeal to you? Would you want there to be an appraisal on a home that you are buying? You might, and you will certainly have the option. However, the regulatory agencies have concerns about the quality of the average appraisal, and believe that in many cases it adds little or no value to them in terms of evaluating the collateral for the loan. (The collateral is your home.)
This is an area where your interests and the lender’s are exactly aligned. You want to know, with confidence and as closely as possible, that the price you are paying for your home is fair and reasonable; the bank wants to know that its lending decision is based on an accurate assessment of the value of its collateral. The question is: What is the most reliable, but least expensive, way (in terms of money and time) to get that information?
If you would like to make a comment on the proposed rule change (yes, average citizens may comment on this) you can find instructions to do so in the notice of the proposed rulemaking. (See page 2-3.)
If the rule is changed, most mortgages under $400,000 made through a bank or credit union should become slightly faster and less expensive.
Housing Wire, “Regulators Propose Ending Appraisal Requirement on Some Home Sales of $400,000 and Below”
FDIC, “Notice of Proposed Rulemaking and Request for Comment”