Going Commando Under $400K: the Death of the Home Appraisal?

appraisal
The mood in Washington, D.C. these days is to unwind regulation. So I guess we should not be surprised that the Office of the Comptroller of the Currency recently said it is considering going commando, so to speak, on appraisals for residential real estate transactions under $400,000. The current rules in place now do not require appraisals for properties at $250,000 and below. That threshold is being inched up in the name of burden relief.

Instead of an appraisal, transactions below $400,000 would require an “evaluation”. (I’m guessing AVMs.) Ryan Lunquist, who started a petition against what real estate experts are calling a very dangerous move as well as job killer, says it will be individuals who have no appraisal licenses or certification, and are not subject to state regulatory oversight requirements that govern appraisers. The evaluators could even be an “independent bank employee” or unnamed “third part(ies).” They would, however, have to be “competent” and possess “knowledge of the market, location and type of real property being valued.””

What is a bit more disturbing to me, and probably most Realtors, is how the proposal, which is a joint agreement between the Office of the Comptroller of Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, could put a greater emphasis on the property valuations given by real estate portals like Zillow and Redfin, which offer online “zestimates” that we know are not accurate, particularly in a non-disclosure state like Texas. Zillow and Redfin have been sued for vast valuation inaccuracies.

This could also be a real job-killer for the appraisal industry, coming in just as the crosswinds re changing in real estate.

SO YOU ARE GOING TO WANT TO SIGN THIS PETITION.  

“The agencies believe raising this threshold for residential real estate transactions from the current level of $250,000, last increased in 1994, could provide meaningful burden relief from the appraisal requirements, without posing a threat to the safety and soundness of financial institutions,” — this in a statement from the OCC.

Now those evaluations for props lower than $400,000 would have to be consistent with “safe and sound banking practices”, whatever that is, and transactions overseen by the Fair Housing Administration, the U.S. Department of Veterans Affairs, the U.S. Department of Agriculture, Fannie Mae, and Freddie Mac would still be subject to a certified appraisal.

How many homes would this affect? According to The National Association of Realtors, 50 percent of homes sold in October 2018 would not have required an appraisal under the regulations. That’s half!

NAR sent out a statement that it basically agrees with this idea, thinks it will increase market efficiency, but worries about consumer protection.

“However, with any such proposed change, America’s 1.3 million Realtors believe we must prioritize consumer protection and the continued assurance of market safety and soundness,” the statement reads. “We will continue to work towards that goal during this and all future conversations with these agencies going forward.”

Experts in the appraisal field, such as Bill Merrell, national education director for the National Association of Real Estate Appraisers, think this is just a disaster for both appraisers and consumers:

“I think it’s going to hurt the industry because it’s going to allow somebody with no knowledge of what a house is worth to just arbitrarily use comparable data without checking what’s inside or outside of it,” Merrell said. “You could have two houses – both houses identical in size and shape – and one house could be worth $100,000 more or less than the other house predicated on the interior finishings.”

Jonathan Miller of Miller Samuel in New York City agrees– in fact, he alerted me to the announcement earlier in the week.

“The consumer is not being protected in this proposal because quality of valuation is being ignored,” says Jonathan. ” The regulatory community is promoting speed and cost without any concern about quality – which is exactly what happened during the housing bubble.  I’m going out on a limb here to say that a house with 200 feral cats in it is not detected by financial models.”

Feral cats! How about hidden water (or other) damage cameras cannot catch?

Here’s the problem: let’s say your home is appraised incorrectly. You buy a home for $400,000, but it is really worth $300,000. You will have the right to sue the appraiser who screwed up and try to be made whole. No appraiser, no one to sue and replenish at least a portion of your $100K loss. For some reason, you cannot sue the bank.

“You can’t sue a bank, but you can sue an appraiser if the appraiser over values a home,” Merrell said.

While this move will “absolutely,” take work away from appraisers, there is still time to fight it. The three agencies are taking public comments over the next 60 days. So you might want to write them. And you certainly want to sign this petition:Remember liar loans of a decade ago? Those same people want to do away with appraisers. [Sign the Petition at Change.org]

2 Comment

  • DCAD refuses to consider the appraisal when determining its own made-up value for our house. It’s useful for getting the right amount of money from the bank, but once that’s done, apparently it doesn’t matter anymore?

  • A bit of a side note. The home of Zillow’s own CEO sold for 40% less than his “Zestimate”. A bit embarrassing at the time, and it points to the continued inaccuracy of AVMs (though they’re getting better). With that in mind, doing away with appraisals could hurt the consumer (who in some cases would overpay), but would also be a much higher risk to the lender, who could be “over-lending”. If/when those loans without appraisals go into default, the loss severity would be huge. And this is coming on the heels of reducing credit score requirements. It all just seems risky to me. Defaults are very low right now, and it seems like the wrong time to be loosening underwriting requirements.