Certain home sales of $400,000 or less will not need an appraisal since federal regulators approved a proposal to increase the threshold at which residential home sales require an appraisal.
Last November, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve released a proposal that would increase the appraisal requirement from $250,000 to $400,000, meaning that certain home sales of $400,000 and below would no longer require an appraisal.
The agencies deliberated the rule for nearly a year, taking into consideration the more than 560 comments the agencies received about the rule change.
Last month, the FDIC and OCC signed off on the rule, but were still waiting on the Fed to approve the rule change as well. Now that the Fed has also given the rule change its stamp of approval, and with all three agencies signing off, the appraisal rule change will go into effect as soon as the final rule is recorded and published in the Federal Register. (The final rule can be read here.)
“The appraisal threshold was last changed in 1994,” the federal agencies said in a joint statement. “Given price appreciation in residential real estate transactions since that time, the change will provide burden relief without posing a threat to the safety and soundness of financial institutions.”
A spokesperson for the FDIC told HousingWire that the rule has been submitted to the Federal Register, adding that the publication of the rule should take place within a matter of days.
The Exception: Government Loans Involved
Now, it’s important to note that the new rules do not apply to loans wholly or partially insured or guaranteed by, or eligible for sale to, a government agency or government-sponsored agency.
That means that loans sold to or guaranteed by the Federal Housing Administration, Department of Housing and Urban Development, Department of Veterans Affairs, Fannie Mae, or Freddie Mac would still require an appraisal, per each agency’s rules.
It’s also important to note that the rule does not entirely exempt the relevant home sales from any type of appraisal-type action. According to the agencies, the final rule “requires institutions to obtain an evaluation to provide an estimate of the market value of real estate collateral.”
The agencies state that the evaluation must be “consistent with safe and sound banking practices.” To that point, the rule establishes that an evaluation “should contain sufficient information and analysis to support the regulated institution’s decision to engage in the transaction.”
Arguments For and Against According to the agencies, many of the comments they received suggested that evaluations are “appropriate substitutes for appraisals and institutions as having appropriate risk management controls in place to manage the proposed threshold change responsibly.”
The Evaluation Guidance states that, generally, evaluations should be performed by persons who are competent, independent of the transaction, and have the relevant experience and knowledge of the market, location, and type of real property being valued.
Pros and Cons
According to the FDIC, those commenting in support of the rule stated that an increase would be appropriate given the increases in real estate values since the current threshold was established in 1994. Other commenters stated that the increase would provide “burden relief for financial institutions without sacrificing safe and sound banking practices.”
On the other hand, commenters opposed to the rule change stated that the proposal would “elevate risks to borrowers, financial institutions, the financial system, and taxpayers.”
Other commenters noted that the rule could have an outsized impact on certain consumer groups, such as low-income individuals, members of certain minority groups, or first-time homebuyers, because those borrowers are more likely buy homes in the lower price range, and would, therefore, be more likely to buy a home without an appraisal.
According to the final rule, many commenters opposed to an increase in the threshold argued on behalf of appraisers, stating that appraisers are “the only objective and unbiased party in a transaction and bring checks, balances, and oversight to the mortgage lending process.”
