Stephen Sousa

Federal banking regulators are proposing a rule change that will deprive hundreds of thousand consumers of an important safeguard in the homebuying process. 

The federal banking agencies (the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency) would like to eliminate a requirement for residential real estate appraisals when the loan amount is below $400,000. This represents a 60 percent increase from the previous threshold of $250,000 for loans intended for sale to government-backed investors such as Fannie Mae or Freddie Mac.  

The exact same proposal was raised and answered by the agencies less than two years ago as part of the federally mandated regulatory relief process – a process that encompassed four different notice and comment periods and six public hearings.  

From that process, the same agencies released in their joint report the following statement: “Based on considerations of safety and soundness and consumer protection, the agencies do not currently believe that a change to the current $250,000 threshold for residential mortgage loans would be appropriate.” 

What changed since the last proposal? Interest rates have increased and refinance activity has decreased, which has reduced the original concerns and pressures that gave rise to the 2017 discussion around the threshold when, by a margin of 5 to 1, commenters opposed any increase in the appraisal threshold.  

Appraisals play an important consumer protection role. By mandating in the Dodd-Frank Act that an appraisal must be provided to prospective homebuyers no fewer than three days prior to closing, Congress recognized that the appraisal gives homebuyers critical information regarding the transaction they’re about to consummate. 

No Protection and No Relief 

There is a breathtaking statement found in Table 2 of the banking agencies’ proposal. The table, which uses 2017 Home Mortgage Disclosure Act data, shows that 72 percent of all mortgage transactions regulated by the banking agencies would have been exempt from FIRREA Title XI appraisal requirements if the proposed $400,000 threshold was in place at the time. 

In plain English, they’re saying seven in 10 American homebuyers don’t deserve an appraisal when making the single largest investment of their lives. 

The argument being made in support of the proposal is that roughly two-thirds of the total dollar volume originated in 2017 is still above the threshold, and therefore the safety and soundness of the housing finance system is still protected. However, this leaves $164 billion in loan volume exempted from Title XI appraisal requirements – still a big enough number to cause major issues were there to be a significant downturn in the housing market. 

Homebuyers are by and large not regularly engaged in real estate transactions, nor are they constantly tracking market trends in their area or on a regional or national basis. Even with the proliferation of free automated valuation models (AVMs), which are fraught with their own issues, the only sure way for a homebuyer to have a solid grasp on the value of their potential home is through the appraisal. By pushing even more transactions out of the realm where an appraisal is required by law or regulation, not only are homebuyers denied the best possible source of value information, but the risk of overpaying in the transaction increases.  

Alternative valuation products, like AVMs and evaluations, lack both the underpinnings of robust professional standards (i.e. the Uniform Standards of Professional Appraisal Practice) and the ability to seek redress through a state agency as exists with the various state appraiser licensing boards. Under the proposal, not only would homebuyers be deprived of the best possible valuation, they would in many cases be prevented from seeking relief where an alternative valuation source proves to be unreliable and misleading. 

So here we sit, with a proposal whose impetus is lacking, whose rationale is illogical and whose impact to homebuyers is negative. There is no reason, now or in the future, to increase the threshold. By no measure should this proposal be finalized, and everyone who understands its practical failings should make sure to comment with the agencies prior to Feb. 5.  

Stephen Sousa is executive vice president of the Boston-based Massachusetts Board of Real Estate Appraisers, an association for valuation professionals founded in 1934.