FDIC’s New Mortgage Appraisal Rule Ignores Lessons of Great Recession



After a vote today by the Federal Deposit Insurance Commission (FDIC) Board of Directors, banks making home mortgages will no longer need to obtain an appraisal for mortgages under $400,000. With the increased threshold approved by the FDIC today, a total of 72% of home mortgage transactions will be exempt from the Dodd-Frank Act’s rules protecting the integrity of appraisals. The vote, quietly supported by the Consumer Financial Protection Bureau (CFPB), raised the existing threshold for mandatory appraisals from $250,000. Congress first required banks to get appraisals in 1989, after the savings and loan crisis, and gave banking regulators permission to exempt loans below a dollar-value threshold. But in 2010, after shoddy appraisal practices were found to play a major role in the Great Recession, Congress required the CFPB to first sign off on any plans to increase the threshold.

real estate appraisal
© James Martin – Fotolia.com

The CFPB’s support for this plan is a reversal of the Bureau’s 2017 objection to an identical plan. The Bureau, then led by Richard Cordray, shared concerns (see page 36) that the higher threshold posed a risk to consumers. That objection forced the regulators to drop the plan because the Dodd-Frank Act bars federal banking regulators from increasing the threshold unless the CFPB concurs that the new threshold provides reasonable protection for consumers.  

The exemption expanded by the FDIC today will allow banks to use lightly regulated “evaluations” instead of federally regulated real estate appraisals. Inflation and falsification of real estate valuations contributed to the national foreclosure crisis that led to the Great Recession ten years ago. This change will mean that rules added by the Dodd-Frank Act to protect the integrity of appraisals will not apply to 72% of home mortgage transactions.

“Appraisals protect consumers and the economy,” said National Consumer Law Center Staff Attorney Andrew Pizor. “Without them, consumers can be cheated by mortgage brokers, home sellers, real estate agents, and anyone else who gets paid based on the size of the loan. Shoddy property valuations helped cause one of the biggest financial crises in our nation’s history. The FDIC’s vote is a step backwards.”

“This rushed rule change is both disappointing and dangerous,” said Jennifer S. Wagner co-director of Mountain State Justice in West Virginia. According to Wagner, who is the consumer representative on The Appraisal Foundation Board of Trustees, “In 2017, regulators held multiple hearings and decided that raising the threshold was not a good idea and would likely be harmful to both consumers and the economy. There is no justifiable basis for this sudden change of direction.”

Comments

  1. For the past 15 years appraisals have been a joke anyway. They always come out to the “Agreed” upon price between the buyers and sellers. If they didn’t, the appraiser would not be in business for very long.

    • You seem to be part of the problem with that attitude.

    • You and your “They always come out to the Agreed”. This really shows how much you really know. I have been an appraiser for 25 years and do not force values in appraisal reports, but I am still in business!!

  2. Susan Rains, Realtor says

    I agree that we should not change the “checks and balances” we have in safeguarding home valuations that we so depend with the appraisers. I am a Realtor, and in my little corner of the world, our companies set a one time fee to sell a home. It’s not hidden or deceptive. We work hard to market and help the consumers who can afford to pay a commission, sell and purchase. Some people think it’s easy, and can be automated well, we make it LOOK easy, but there is much involved in the services we provide. If your a professional you take care of your clients best interests. NOT your own. This gets overlooked so much. Banks, Lenders have their way of doing loans that we can not control. I think that is where the danger lies with automation. You still need boots on the ground to properly sell, advise the public. I really think people should think before jumping to conclusions that all Realtors are greedy because the majority of us are not! Just Saying!!

  3. The lower price point homebuyers need the protection more than higher end. Not a good move in my opinion.

  4. This report is misleading. The threshold applies to BANK loans not Fannie, Freddie, FHA or VA
    Under the current $250k threshold 56% of the loans already qualified to an appraisal exemption but virtually all of them still had appraisals. The FFIC estimates that the new threshold will only increase the number exempt 16% which is where the 72% came from but again the banks are still having appraisal done. The only way the bank can use an evaluation is if they have already appraised it.

    This new regulation will.have.little or no impact on the greater mortgage.market.

    • Scott – If that is the case, I’d be interested in your perspective in why they changed the rule at all.

  5. This only pertains to BANKS
    The vast majority of loans are sold to Fannie and Freddie
    The FDIC oversees banks

  6. Ron Schwartz says

    Once again the govt refuses to learn from history…the govt is bending over backwords for realtors and mtg brokers whose livelihoods are based on the percentage of the loan or sales price and who pump up unrealistic and unsupportive sales prices..shame on all of you…real estate appraisers are the only buffer that help protect the public…this ruling shows once again how disconnected govt personnel are to the citizens they are supposed to serve…Do you not remember previous real estate recessions that were caused by greed???

    • Shoddy appraisal practices??? How about shoddy ass lending practices??? Giving people loans based on a promissory note 🙄