Three federal agencies that govern and regulate U.S. banks and other financial institutions are seeking to increase the appraisal exemption threshold from the current threshold of $250,000 to $400,000. The agencies seeking the change 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.
Today’s threshold was set in 1994, when home prices were significantly lower. The agencies claim increasing the threshold will remove some of the burden on buyers of low-priced real estate, while maintaining the integrity of financial institutions.
Instead of requiring an appraisal, the agencies propose that homes purchased for less than $400,000 will need an evaluation to estimate the home’s fair market value (FMV). This evaluation will not need to be completed by a licensed appraiser, and will be less detailed and therefore less costly.
The agencies are asking for public comment on the proposal. Comments need to be received by February 5, 2019 to be considered. Comments may be submitted:
Legislative and Regulatory Activities Division
Office of the Comptroller of the Currency
400 7th Street SW
Washington, DC 20219
The dangers of fewer appraisals
Appraisals are conducted mainly to protect the interests of lenders, and ultimately the interests of the entities to which lenders bundle and sell their mortgages, such as Fannie Mae and Freddie Mac. But appraisals also protect the interests of homebuyers, who, caught up in a rapidly rising market, may end up paying more for a home than it’s worth. This results in underwater homeowners, a situation that may increase the likelihood of foreclosure.
In California, the current threshold of $250,000 leaves nearly all home sales unaffected and requiring an appraisal. But under the proposed change, more low-tier sales will fall under the exemption. For reference, this is the segment of the market that is the most volatile, and the most susceptible to large swings in home values, evidenced by the 2009 foreclosure crisis.
Increasing the appraisal requirement threshold will mean fewer appraisals are conducted, decreasing the protection for homeowners, lenders and government agencies alike.