Last year, the FDIC, OCC, and the Fed proposed raising the threshold for residential appraisals for the first time since 1994. This year, that proposal became a reality when the agencies adopted a final rule that increases the threshold level for which appraisals are not required from $250,000 to $400,000.
Last month, the new rule was approved, and on October 9, 2019, it officially went into effect. Going forward, certain home sales of $400,00 and below will no longer require residential appraisals. According to the FDIC, the final rule defines a residential real estate transaction as “a real estate-related financial transaction that is secured by a single 1-to-4 family residential property.” However, residential real estate transactions that fall within the appraisal threshold will still require an evaluation of the property collateral obtained by the regulating institution.
What You Need to Know Regarding Residential Appraisals
As with most regulatory changes, there are, of course, exceptions to the rules. In this instance, the new regulations for residential appraisals do not apply to government loans. This means loans that are wholly or partially insured and/or guaranteed by or are eligible for sale to a government agency are not included under the new threshold. These include loans sold to or guaranteed by the Federal Housing Administration, Department of Housing and Urban Development, Department of Veterans Affairs, Fannie Mae, or Freddie Mac as they will still require an appraisal.
In addition, transactions secured by residential property in rural areas that have been exempted from the agencies’ appraisal requirement per the Economic Growth, Regulatory Relief, and Consumer Protection Act will also require evaluations.
Finally, the FDIC states that the “final rule also amends the agencies’ appraisal regulations to require regulated institutions to subject appraisals for federally related transactions to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice.”
One additional thing to note for community banks, according to the OCC, is that the final rule applies to all OCC-supervised banks.
The OCC also states that the evaluation requirement for transactions exempted by the rural residential appraisal exemption and the requirement to review appraisals for compliance with the Uniform Standards of Professional Appraisal Practice will go into effect on January 1, 2020.
What the Rule Change Means for the Real Estate Market
Using HMDA data, the agency staff estimated the number and dollar volume of residential transactions that would be affected by the increased threshold. Here’s what the numbers reveal:
- The new threshold will apply to approximately 40 percent of home sales.
- In 2017, 750,000 transactions were exempted from the appraisal requirement. It’s estimated that the threshold for residential appraisals would have resulted in 214,000 additional mortgages not requiring an appraisal in that year.
- The above number represents three percent of total HMDA originations.
- Under the new threshold, 72 percent of eligible transactions would have been exempted from the appraisal requirement.
- Of those same transactions, 28 percent would still require an appraisal.
- Raising the threshold to $400,000 will exempt an additional estimated 14 percent of the dollar volume, therefore increasing the share of the dollar volume of regulated transactions that are exempt to approximately 35 percent.
Ultimately, the new rules will have an impact on the real estate market — and hopefully for the better. The FDIC stated that the move “could provide meaningful burden relief from the appraisal requirements, without posing a threat to the safety and soundness of financial institutions.”
Do you have questions or concerns regarding the latest requirements for residential appraisals? At MountainSeed, we’re well versed in the latest rules and regulations when it comes to appraisal management. Contact us today to learn more.