The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) have adopted a rule raising the appraisal requirement for certain types of residential real estate transactions from $250,000 to $400,000.
The rule essentially applies only to mortgages that a lender is willing to hold in portfolio. It does not apply to loans sold to or guaranteed — in whole or in part — by a government agency or government-sponsored enterprise. Mortgages sold to or guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration, the U.S. Department of Veterans Affairs and the U.S. Department of Housing and Urban Development still require appraisals, as dictated by the various issuing and sponsoring agencies.
The new rule was signed by the secretary of the Fed’s board of governors last week and announced by the three agencies via a joint statement. The agencies originally proposed the rule in November 2018, with the FDIC and OCC approving it this past August, leaving the Federal Reserve as the lone step before adoption.
The new appraisal threshold will go into effect once the final rule is published in the Federal Register. Per the register’s website, it typically takes three business days for a rule to be processed, once an agency files it with the register’s office.
The change will be the first modification to the appraisal threshold since 1994. The agencies said that the shift was made due to price appreciation in residential real estate transactions since that time.
The new requirement, the agencies said, will “provide burden relief without posing a threat to the safety and soundness of financial institutions.” Some remarks during the proposed rule’s mandatory comment period said that the threshold increase would benefit consumers by reducing delays and costs associated with appraisals, making the mortgage process more efficient and reducing closing costs on a home purchase.
After the rule is officially registered, transactions exempted from the appraisal requirement will instead be required to obtain an evaluation to estimate the property’s market value. Evaluations, which the federal agencies described as “generally less burdensome than appraisals” and “required since the 1990s,” also were recommended by several public comments, according to the agencies.
Taking 2017 data as an example, an additional 16% of home loans covered by the Home Mortgage Disclosure Act would have been exempted by the $400,000 threshold, accounting for some $68 billion in origination volume. Added to the 56% of originations ($96 billion) that were already exempt via the previous $250,000 requirement, and that means that 72% of transactions would have been exempted from appraisals.