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By Ron Haynie
If you ask mortgage lenders about the major pain points for both consumers and lenders in processing, underwriting and closing mortgage loans, they are likely to say getting the property appraisal done on a timely basis is most challenging.
The perfect storm of increased demand from consumers purchasing or refinancing their homes and a limited supply of appraisers—especially in rural or small-town markets—can cause processing times to increase substantially. And the general aging of the appraisal industry has also contributed to shortages of appraisers in certain markets, which can lead to increased processing times and higher costs for consumers.
While the appraisal industry is working to address these issues, lenders and mortgage investors like Fannie Mae and Freddie Mac have increased their use of automated valuations and other forms of property evaluations.
Fortunately, the federal banking agencies are trying to provide some help as well. The agencies recently responded to industry requests with a proposed rule to increase the threshold where bankers could use a property evaluation in lieu of a full appraisal—completed by a licensed or certified appraiser—for mortgage loans they retain in portfolio. The agencies are proposing to increase this threshold from $250,000 to $400,000.
The current threshold was set in 1994, so it is certainly in need of an update. And because these are portfolio loans in which lenders carry 100 percent of the credit risk, they are incentivized to perform thorough evaluations.
Additionally, the S. 2155 regulatory relief law signed earlier this year provided for similar relief for banks in rural markets. The agencies’ proposed rule would expand that relief to all institutions and markets.
To be clear, banks must still obtain a thorough evaluation of the subject property to determine if it supports the loan request. They can obtain that evaluation through a third party, such as a real estate broker, or have it performed by a bank employee trained to prepare property evaluations. Banks will meanwhile still have to adhere to the various rules governing the independence of individuals who perform these evaluations from the lending function. Nevertheless, raising the threshold to $400,000 should provide an opportunity for community banks to better serve their customers with a lower-cost alternative to a full appraisal, not to mention the ability to shorten loan-processing timeframes.
While some appraisal groups have raised concerns regarding safety and soundness, default data from the Great Recession and HMDA data would indicate that these fears are unfounded. Bankers will need to develop internal policies on the use of evaluations and full appraisals, and they’ll need to continue to monitor the quality of both. But for some of their mortgage loans, this change could provide a real improvement in how they can serve their customers.
Ron Haynie is ICBA senior vice president of mortgage finance policy.