In November, the U.S. federal agencies which oversee the banking system proposed new guidelines for real estate appraisals. One would imagine that these guidelines would be in keeping with the new more stringent regulatory frame of mind the financial services sector. This is not the case.
In fact, the new proposal appears to entirely eliminate mandated written appraisals in connection with cramdowns, refis, and Fannie/Freddie loans. The key verbiage is on pages 45-48 of the guidelines:
In general, renewals, refinancing, and other subsequent transactions may be supported by evaluations rather than appraisals….
An institution may modify the terms of an existing credit without obtaining a new appraisal or evaluation. Such modifications should not involve any advancement of new funds, any material change in the borrower’s creditworthiness, any change to the borrower’s or guarantor’s obligation on the credit, or any changes to the collateral pool or deterioration in collateral protection…..
This exemption applies to transactions that are wholly or partially insured or guaranteed by a U.S. government agency or U.S. government-sponsored agency. The Agencies expect these transactions to meet all the underwriting requirements of the federal insurer or guarantor, including its appraisal requirements, in order to receive the insurance or guarantee.
As you may recall, inflated appraisals were at the center of much of the recent house price inflation in the United States. Many appraisers complained that mortgage brokers and loan officers steered business to appraisers who inflated appraisals to meet mortgage loans. In some cases, there was outright appraisal fraud.
As a result, many in the housing industry are looking to Washington for leadership in creating a more robust regulatory framework to eliminate wrongdoing in housing and bring confidence back to the market. They are waiting in vain.
The American Society of Appraisers (ASA) has had a look at the new guidelines and is coming out against them in the most categorical way (Hat tip, Scott). If this issue is any reflection of Washington’s will to eliminate incentives for mischief, we are likely to be disappointed.
First, the guidelines came out in November with a statement that they were beefing up and clarifying guidelines in appraisals (see press release here). They requested comments on those guidelines.
Then, the ASA, having looked over the guidelines, released a statement on the 20th which roundly condemned the new guidelines. Their statement is below.
