AppraisMore Transactions Qualify for Appraisal Exemption under New Rule

For the first time in 25 years, federal regulators have increased the property value limit for certain residential real estate transactions requiring an appraisal.

On September 27, the Board of Governors of the Federal Reserve System (the Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) approved a plan enabling certain homes worth $400,000 or less to be subject to an evaluation rather than an appraisal.

The last time this threshold changed was in 1994, when regulators set the rule for properties worth $250,000 or less. However, in a joint statement, the federal agencies said, “Given price appreciation in residential real estate transactions since that time, the change will provide burden relief without posing a threat to the safety and soundness of financial institutions.”

The agencies deliberated on the proposed rule change for nearly a year, reviewing hundreds of public comments on the matter.

However, it’s important to note that the new rule doesn't apply to transactions in which the buyer is purchasing the home with financing wholly or partially insured by a government-run or government-sponsored agency, including the Federal Housing Administration, Department of Housing and Urban Development, Department of Veterans Affairs, Fannie Mae, and Freddie Mac.

Doug Petroff, of Petroff Appraisals, says considering these specifics, he believes most residential transactions will not be affected by the change.

“The majority of buyers utilize financing through one of those listed agencies, so for most of us, things will be status quo and full appraisals will still be required,” he said. “For exempted transactions, this new rule may help to streamline the process and make things more cost-effective.”

Under the proposal, instead of requiring a full appraisal, lenders would need to obtain an evaluation of a property to provide an “estimate of the market value of real estate collateral.”

According to the federal agencies behind the rule, “evaluations provide an estimate of the market value of real estate but could be less burdensome than appraisals because the agencies’ appraisal regulations do not require evaluations to be prepared by state licensed or certified appraisers.”

Those opposed to the change stated that raising the threshold would “elevate risks to borrowers, financial institutions, the financial system, and taxpayers.” Many of those who commented also argued on behalf of appraisers, stating that real estate appraisers are “the only objective and unbiased party in a transaction and bring checks, balances, and oversight to the mortgage lending process.”

“Despite their growing use, there are concerns about the accuracy of automated valuation models,” said Petroff. “This technology uses algorithms and statistics to come up with a value, but homebuyers don’t shop statistically and there are many other factors that go into a full appraisal.”

According to REALTOR® Magazine, The National Association of REALTORS® (NAR) advocated that any loan limit related to an appraisal exemption be tied to specific markets rather than a blanket number for the whole country. According to NAR, “a $100,000 limit might be reasonable in some parts of the country, and a $500,000 limit might be reasonable in others, depending on average housing values.”

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