The recent FDIC, OCC, and Fed proposal to raise the appraisal threshold to $400,000 has been causing many reactions from the industry professionals, most notably from appraisers. And not all of them are positive — in fact, it seems that the proposal is raising plenty of concerns for the industry.
For the first time since 1994, it’s proposed that the threshold at which residential home sales would require an appraisal should increase. Appraisers are drawing a parallel to the state of the lending environment before the financial crisis, and warning federal regulators that this proposal may bring about another housing crisis.
Raising the threshold from $250,000 to $400,000 would necessarily mean that there would be no appraisal required for home sales under $400,000. FDIC data suggests that this may result in over 200,000 fewer assessments performed, judging by the 2017 data. It would undermine the importance of appraisers in sales and real estate deals, and replace appraisals with evaluations, which are typically less costly, but also less detailed. However, the new rules wouldn’t apply to loans that are wholly or partially insured, guaranteed by, or eligible for sale to a government agency, or to a government-sponsored agency.
The proposal would still have a significant impact on the number of transactions that would be exempted from the appraisal requirement. According to FDIC data, 56% of deals were exempted from that requirement in 2017, under the current rules that the threshold is at $250,000. However, if the provisions of the proposal were to be applied, there would be 72% of all transactions that wouldn’t fall under the appraisal requirement, which counts for around 964,000 agreements. By the 2017 data, that would make approximately $164 billion in sales exempt from the appraisal requirement, which is 35% of the total.
The appraisers are concerned that this proposal is running in contrary to the decision of Congress to help with the lack of available appraisers in rural areas. Furthermore, they feel that the plan will result in a dangerous return to the practice of making more loans at the expense of risk management and appraisal.
Realtors have similar concerns regarding the appraisal threshold increase, as they feel that this would also increase the risk management requirements for lending institutions. In addition to that, the smaller number of appraisals performed in residential real estate transactions would put safety and soundness of the neighborhoods into questions. The regulators disagree, stating that it would be beneficial to relieve the appraisal requirements and that the changes would not be a threat to the safety and soundness of financial institutions.
In uncertain market conditions, real estate appraisers and other industry professionals need to think about legally protecting their business. It’s crucial to have insurance that would cover you and ensure that you can stay in business. Talk to an insurance professional about your options and ensure that your practice remains safe.
John Torvi is the Vice President of Marketing & Sales at the Herbert H. Landy Insurance Agency of Needham, MA. John has been in the insurance industry, focusing on the needs of business owners, for over 27 years. He holds a Bachelors Degree from Providence College and a Masters Degree from Springfield College and is a frequent speaker and contributor to professional journals and conferences for the legal, accounting, real estate and insurance industries.
The Landy Agency is a national leader in providing non-medical, professional liability and cybercrime insurance for accountants, attorneys, and real estate professionals. John can be reached at 781‐292‐5417 or johnt@landy.com. Visit www.landy.com for more information.
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