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Appraisals Are Being Delayed and Drastically Modified to Speed Loan Deals

[Updated: Sep 16, 2020 ] Apr 16, 2020 by Marc Rapport
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Federal regulators this week have thrown another lifeline to a slowing housing market by further loosening the rules around appraisals.

The Federal Insurance Deposit Corp. (FDIC), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau (CFPB), and Federal Reserve have agreed to allow lenders to defer some appraisals for up to 120 days after the closing of some residential and commercial real estate transactions.

In a joint announcement, the regulators said they are "providing this temporary relief to allow regulated institutions to extend financing to creditworthy households and businesses quickly in the wake of the national emergency declared in connection with COVID-19."

The new appraisal rule expires at the end of the year, unless the agencies decide to extend it. First mortgages for existing homes and refinancing are included in the new rule, but new construction is largely exempt from the loosened standards and will require traditional appraisals.

Desktop and exterior-only appraisals

In their five-page interagency statement, the regulators waive the requirement for interior inspection of a property and instead -- "as long as the analysis is credible" -- will allow desktop and exterior-only appraisals for residential deals up to $400,000 and commercial deals up to $500,000, or $1 million if it's a business loan where the loan doesn't depend on rental income or another real estate sale as the primary source of repayment.

Fannie Mae and Freddie Mac, the government-sponsored enterprises that back the loans for a big chunk of the market, already had loosened their guidelines to allow drive-by and desktop appraisals.

Further easing of the rules

That was last month. The rules announced this week expand that to allow loans backed by Freddie Mac to be sold without an appraisal in some circumstances, joining Fannie Mae, which already had that waiver in place for some refinancing transactions. Existing appraisals also can be used for new deals if the lender can show that the estimates of value are still valid.

Falling interest rates had spurred a surge of interest in new money purchases and refinancing that the pandemic, with its social distancing and massive joblessness, has threatened to derail. Easing appraisal rules can remove one of the obstacles to keeping business going, according to this analysis by The Brookings Institution.

But they warned lenders not to throw caution to the wind. "While appraisals and evaluations can be deferred, the agencies expect institutions to use best efforts and available information to develop a well-informed estimate of the collateral value of the subject property," it says on page 11 of the full 22-page rule.

That said, "the agencies encourage financial institutions to make use of these (appraisal) exceptions," their statement said.

Speaking up for appraisers

Not everyone is a fan of the move. "Appraisers play an important role in the housing market, especially during such an uncertain period where the market has changed dramatically over the past month," appraiser Ryan Lundquist of Lundquist Appraisal Co. in Sacramento, California, told HousingWire.

"We're all making adjustments in life and business in light of the pandemic," Lundquist said in the interview, "but it's important to let appraisers walk in their role as a system of checks and balances for the housing market."

Now, only time will tell if loosening the appraisal rules will help offset the reported tightening of credit standards also beginning to take place in the mortgage market.

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