The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency surprised the mortgage business Tuesday evening when they announced that banks will soon be able to postpone getting an appraisal for 120 days after a mortgage closes.
The regulators said the change, which applies only to loans kept in a bank’s portfolio, is designed to expedite the process of getting funds to businesses and individuals.
Unsurprisingly, appraisers are concerned about the prospect of not being involved in the transaction until four months later. But that’s not their only concern.
As stated above, the appraisal delay only applies to portfolio loans, but several appraisers and appraiser groups told HousingWire Wednesday that they’re worried that the GSEs or the Federal Housing Administration could soon follow in the banking regulators’ footsteps.
“Appraisers play an important role for the housing market, especially during such an uncertain period where the market has changed dramatically over the past month,” Appraiser Ryan Lundquist told HousingWire.
“We are all making adjustments in life and business in light of the pandemic, but it’s important to let appraisers walk in their role as a system of checks and balances for the housing market,” Lundquist continued. “One of my concerns here is not so much this rule in itself, but whether this will serve to inspire the GSEs and decision-makers to back off using appraisers during this critical moment in the market. My sense is appraisers are ready and willing to work, so a ruling like this seems to be another example of a decision made without consultation from actual appraisers.”
The FHA, Fannie Mae and Freddie Mac have all recently relaxed their appraisal rules to allow exterior-only appraisals (known as drive-by appraisals) or in some cases, desktop appraisals, where the appraiser doesn’t inspect the property or comparable sales.
Several appraisers acknowledged these rule changes and said they feel they are sufficient to address social distancing protocols or stay-at-home orders in various states and cities.
“The thing is, the appraiser isn’t the problem,” Miller Samuel President and CEO Jonathan Miller told HousingWire.
“Property access has been solved temporarily by drive-bys and desktops via FHFA for sales. But refinance activity has been limited because the banks don’t want to take on the risk,” Miller continued. “After all, they don’t trust the daily changes in regulations by the federal government, have real concerns about a future with falling values and significant liquidity risk. The primary problem is liquidity, and all this rule does is unleash a potential tsunami of mortgage fraud and predatory lending on the housing market when people are most vulnerable.”
Miller also noted the potential for property values to drop within the 120-day delay, which the regulator said that banks need to be prepared for.
“The agencies also expect institutions to develop an appropriate risk mitigation strategy if the appraisal or evaluation ultimately reveals a market value significantly lower than the expected market value,” the agencies stated. “An institution’s risk mitigation strategy should consider safety and soundness risk to the institution, balanced with mitigation of financial harm to COVID-19-affected borrowers.”
But Miller said the industry isn’t actually prepared to deal with a loan suddenly going from a reasonable loan-to-value ratio to an unreasonable one.
“Lenders have seen their mortgage volume drop because of liquidity issues (namely job loss and uncertainty about future income). Lenders are also reluctant to issue low rate loans in this situation given concerns about liquidity and lack of processing capacity, so mortgage rates are not falling in aggregate,” Miller said.
“In essence, they are slightly higher than a month ago,” Miller said. “There is also the likelihood of declining property values going forward, so an 80% LTV could be a 100% LTV tomorrow.”
Lundquist also said that declines in property values could present a real problem.
“There are some unknown factors here. What happens if a loan is made today and then four months later an appraisal happens and the house is worth less than the loan made?,” Lundquist said. “Is the borrower on the hook for the difference? Or will the loan be adjusted by the bank? Or will the bank pull out of doing the loan? This seems very backwards and it could be something that does not end well depending on how these details play out.”
However, if the change doesn’t push beyond bank portfolio loans, the impact of the appraisal delay could be limited as portfolio loans make up a much smaller share of the market than GSE loans, for example.
But Miller doesn’t think the rule’s scope will remain small.
“This rule only applies to federally related transactions, which is a small number of mortgages. Still, you can bet other regulatory bodies will adopt this rule quickly to try to bolster the mortgage volume so people can take advantage of the low rates,” Miller said. “Yet this is not the problem. These three parties have already been critical of the appraisal process, as evidenced by their recommendations to save on cost and timing without consideration of quality and reliability last year.”
Appraiser Lori Noble agreed, stating the rule change does more than just allow banks to delay appraisals.
“The rule also sends a signal of worry across markets that something is seriously wrong in the appraisal space when there isn’t,” Noble said.
“Understandably, some states shut down the interior (in person) appraisal processes but the GSEs, VA and FHA all offered flexible standards for which we can work including desktops and exterior-only appraisals. I’m simply unsure about the FDIC and agencies’ logic,” Noble said.
“Admittedly, it crossed my mind they would rather have equity stripped than have to worry about a run on the banks,” Noble added. “That was my ultimate takeaway and initial reaction to the announcement. ”
Noble also expressed concern about what would happen if property values declined.
“What concerns me the most is having retro appraisals completed in the COVID19 market where the appraised value comes in less than the loan amount. For example, a 25/75 LTV could possibly be at 100% or higher in 120 days,” Noble said.
“As for serving established customers with portfolio loans, I understand the principle of the program. My main concern will be in the reconciliation of the loan if we see values depreciate due to COVID-19 or other economic factors like unemployment,” Noble said.
“Community banks are a great asset and resource to our communities. I hope they continue to err on the side of caution during this abnormally risk-centric market. Having the appraiser’s eyes on the target is the ultimate risk protection but this deference voids those safety and soundness factors and is something the banks will have to address down the road,” Noble concluded. “It’s a lot like kicking the can.”
One appraisal trade group also said that it is concerned about the rule change.
“In a volatile market such as we are in now, this policy, which appears to have been developed without input from appraiser and lender interest groups, will very likely have significant and detrimental unintended consequences,” The Appraisal Foundation President David Bunton said.
Meanwhile, the Appraisal Institute noted that the change does not release banks from needing an appraisal, adding that appraisals are still a tremendously valuable tool for all involved.
“Appraisers are available, willing and able to work. They’re eager to serve their clients during this crisis,” Appraisal Institute Spokesperson Ken Chitester said.
“Keep in mind that the agencies’ final rule still requires appraisals, it simply defers them to a later date. Appraisals are the gold standard for valuation and provide the most value to clients, including lenders. The agencies’ decision might help keep some loans flowing through the pipeline, but it’s important to realize that the appraisal obligation isn’t relieved,” Chitester continued.
Chitester said that one AI member recently did a deal that would fall under this new rule.
“They (the bank) did internal valuations that were pretty conservative on a craft brewery that had multiple facilities offered as collateral. They commissioned appraisals that they’re waiting on right now but proceeded with the loan because the company needs the funds,” Chitester said. “It probably makes sense to do it that way. This practice is potentially allowed under pre-existing regulations. The final rule formalizes that allowance and adds the 120-day parameters.”
Black Knight, which provides valuation software among many other offerings, welcomed the change.
“It’s heartening to see flexibility being offered when it comes to appraisals, both with this announcement and that of the FHFA earlier this month,” Ben Graboske, president of Black Knight’s data and analytics division, told HousingWire. “Given that this only pertains to loans held in a bank’s portfolio – a relatively small share of overall lending – the industry still needs innovative approaches to the problem of conducting appraisals in a pandemic.”
Miller, meanwhile, is much more dubious of the change.
“Perhaps this rule was made with the best intentions, but it reflects a fundamental misunderstanding of what the purpose of an appraisal is,” Miller said. “Let’s hope most banks avoid this recklessness that will be paid for again by the taxpayer.”