MBA Offers Fed Agencies Recommendations to Ensure Safety, Soundness of Appraisals
The Mortgage Bankers Association, in a letter to federal regulatory agencies, expressed support for proposed rule that would raise the appraisal threshold for residential real estate transactions and offered additional recommendations to ensure safety and soundness of lending.
The letter to the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp. supports the agencies’ desire to raise the threshold for appraisal exemptions from $250,000 to $400,000 as a means of leveraging technology to better serve consumers, while also preserving crucial safety and soundness standards.
MBA Senior Vice President of Residential Policy and Member Engagement Pete Mills also offered several recommendations, noting the need to ensure that the loan origination process–including property valuation–is undertaken in a manner that does not compromise bank safety and soundness.
“The validity of the data used in alternative evaluations is highly predicated on the quality of the information found in prior appraisals,” Mills said. “Should banking institutions over-utilize exemptions, resulting in significantly fewer physical appraisals, the integrity of the data and the quality of loan portfolios may be diminished. Therefore, it may be appropriate for the agencies to consider additional best practices for their regulated institutions, including the establishment of a cap on the share of loans within the portfolio for which the appraisal exemption is used.”
In December the agencies issued a Notice of Proposed Rulemaking to Increase the Real Estate Appraisal Threshold (https://www.federalregister.gov/documents/2018/12/07/2018-26507/real-estate-appraisals). The proposed rule seeks to increase the threshold for appraisal exemptions from $250,000 to $400,000 on residential real estate transactions. The original threshold was set at $250,000 by banking agencies in 1994 and has not been increased since that time.
Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 requires the agencies to provide mandatory standards for real estate appraisals. In 1992, the legislation was amended, allowing the agencies to determine an appropriate transaction threshold below which an appraisal conducted by a licensed or state certified appraiser would not be required. Last May, the Economic Growth, Regulatory Relief, and Consumer Protection Act required regulated institutions to obtain alternative evaluations for transactions secured by residential property in rural areas that have been exempted from the agencies’ appraisal requirement, while raising the threshold in these specific areas to $400,000. Support grew for raising the threshold for required appraisals from $250,000 to $400,000 on a nationwide basis.
In the letter, MBA said it supports the agencies’ desire to raise the threshold for appraisal exemptions on residential real estate transactions, noting the proposed increase from $250,000 to $400,000 is consistent with a modest annual indexing of 2 percent per year, and thus would not represent a dramatic increase in the proportion of exempt transactions compared to 1994 when the $250,000 exemption was established. In addition, MBA said given “significant improvements” in development of automated valuation models in recent years, the tools and resources available for the required alternative evaluations are significantly enhanced compared to 1994.
“Such an adjustment is an appropriate response to the significant appreciation in national and regional home prices since the rule was finalized nearly twenty-five years ago,” MBA said. “As a result, we believe the proposal is not a threat to safety and soundness.”
MBA said consumers could also benefit from an increase in the exemption, noting allowing banking institutions to expand their use of alternative evaluations could help offset the effects of appraiser supply shortages, reducing costs and shortening (or eliminating) delays that have occurred in many markets. “More broadly, raising the threshold will create a more efficient residential mortgage market for lenders and consumers by expediting valuations and lowering closing costs,” MBA said.
MBA also proposed additional measures to ensure the safety and soundness of lending practices. It said additional “best practices for the agencies’ regulated institutions, establishment of a cap on the share of loans within the portfolio for which the appraisal exemption is used, would align bank standards more closely with the appraisal waiver standards currently required of Fannie Mae and Freddie Mac.
MBA also suggested the agencies impose guardrails to preserve safe and sound lending practices through consideration of other underwriting factors, such as loan-to-value ratios, credit scores and transaction types when determining the proper use of exemptions. “Much like the use of a cap on loans featuring an evaluation rather than an appraisal, such measures would align bank standards with those currently in place at the GSEs,” MBA said.
