California home prices continue their climb, but an updated appraisal exemption may provide some relief.
Three federal agencies that govern and regulate U.S. banks and other financial institutions are increasing the appraisal exemption threshold from its current amount of $250,000 to $400,000. This means real estate transactions of $400,000 or less will not require an appraisal to secure financing.
The agencies raising the appraisal exemption threshold are:
- the Federal Reserve (the Fed), which supervises member state-chartered banks;
- the Federal Deposit Insurance Corporation (FDIC), which supervises state-chartered banks which are not members of the Federal Reserve system; and
- the Office of the Comptroller of the Currency (OCC), which supervises national banks.
The rule has been finalized by the FDIC and OCC but awaits the Fed’s sign-off for publication in the Federal Register. It will go into effect the day after its publication.
Read the full text of the final rule here.
Do I still need an appraisal?
Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) authorizes the Fed, FDIC and OCC to set appraisal exemption thresholds. This means the new rule applies to mortgages issued by financial institutions governed by those agencies.
To qualify for the exemption, a mortgage needs to:
- be secured by a one-to-four-unit residential property which sold for $400,000 or less; and
- be originated by a lender regulated by the Fed, FDIC or OCC.
Transactions not affected by the appraisal exemption threshold increase include:
- one-to-four-unit residential property transactions over $400,000;
- commercial property transactions (the current $500,000 commercial appraisal exemption threshold remains unchanged); and
- mortgages insured, guaranteed by or eligible for sale to a government agency or government-sponsored entity (GSE).
That last point is an important caveat: mortgages insured, guaranteed by, or eligible for sale to the Federal Housing Administration (FHA), U.S. Department of Housing and Urban Development (HUD), U.S. Department of Veterans Affairs (VA), Fannie Mae and Freddie Mac are not affected by the threshold increase. These transactions still require an appraisal depending on the respective agency’s rules. Because of this caveat, the threshold increase won’t affect most home sales for real estate agents.
Real estate transactions exempt from an appraisal under the amended threshold may otherwise still be required to obtain an evaluation based on the governing agency’s regulations. Like appraisals, evaluations estimate the fair market value of a property. However, evaluations are not required to be performed by a state-licensed or certified appraiser.
This new threshold comes after a review of home prices by the Fed, FDIC and OCC. They analyzed the Case-Shiller Home Price Index and FHFA Index to determine home price changes since 1994, when the previous $250,000 threshold was established.
The agencies believe the new $400,000 threshold is more congruent with today’s home prices. A home that sold for $250,000 in 1994 would be expected to sell for around $630,000 in 2019, according to the Case-Shiller and FHFA indices.
Still, home prices continue their climb. In June 2019, low-tier home prices were an average of 3% higher than the previous year across California’s largest metros. The mid tier fared better comparatively, rising 1% from the previous year. But these climbing prices are only part of what prompted the three federal agencies to reconsider the appraisal threshold.
The threshold increase is also meant to provide homebuyers with some relief by eschewing costly appraisals for homes priced in the low tier. For reference, a typical single-family residential property appraisal will run homebuyers between $300 and $450 according to Bankrate, but can run to $800 in some larger cities or areas with high labor costs.
On the other hand, the threshold increase scales back an important protection for homebuyers. Since evaluations are not required to be performed by a state-licensed or certified appraiser, homeowners and banks may be taking a gamble on the quality of the evaluation.
The Uniform Standards of Professional Appraisal Practice (USPAP) set stringent requirements for home appraisals. Conversely, evaluations are not federally required to comply with the USPAP or be performed by a licensed appraiser. A homeowner may still obtain a home evaluation performed by a licensed appraiser (the USPAP provide appraisers guidelines for this), but such instances are few and far between compared to the gold standard of USPAP-compliant appraisals.
The three agencies invited comments on the new rule before it was approved. Collectively, they received over 500 comments. Financial institutions and state banking regulators expectedly supported the increase while appraisers and consumer advocate groups opposed it.
Proponents commented that the increase would unburden lenders and borrowers without sacrificing sound banking practices. They consider evaluations appropriate substitutes to appraisals. In addition, the increase would cut delays and closing costs for homebuyers.
Opponents commented that eliminating the requirement for a state-licensed or certified appraiser only magnifies risk. As the most volatile segment of the market, the low tier is more susceptible to swings in the market. Since the amended threshold would mostly affect homes in this price tier, homebuyers in this market risk getting caught in the middle of wide home value swings, as in the 2009 foreclosure crisis.
Lax evaluation regulations naturally conjure the familiar spectre of past banking crises. Giving lenders more regulatory wiggle room only incentivizes the use of less stringent evaluations. This is especially worrisome during booms and busts when risk takes a backseat to profits. Many commenters were loath to once again let opportunistic lenders off the hook for risky mortgages.
Nevertheless, the three agencies’ decision to raise the threshold is not bound by the comments. Perhaps more compelling than the comments for the agencies is the fact that the Consumer Financial Protection Bureau (CFPB) unofficially supports the final rule, saying the new threshold provides reasonable protection for homebuyers. With FDIC, OCC and CFPB approval, the path is clear for the Fed’s sign-off.