The value of the appraisal
By: J. David Chapman/December 6, 2018
A joint proposal was recently floated by the Federal Deposit Insurance Corp., the Federal Reserve and the Treasury Department’s Office of the Comptroller of the Currency regarding home appraisals. This proposal would make traditional appraisals unnecessary for many new mortgages originated for less than $400,000.
Instead of an appraisal, these homes would be candidates for an “evaluation” by an “evaluator” who has no license or certification and would not be subject to state regulatory oversight requirements. The evaluator is described as being “competent” and having “knowledge of the market, location, and type of real property being valued.”
The reason given for loosening the standard is to lower real estate costs and reduce the time of closing the homebuying transaction. Currently, an appraisal is not required for new mortgages less than $250,000 as long as the loan is not being sold to government-back investors or insured by the Federal Housing Administration or the Department of Veterans Affairs. If adopted, this “no appraisal” approach would increase this ceiling to $400,000, possibly increasing risk to the program’s investors.
Expectedly, appraisers and appraisal organizations nationwide are outraged by the proposal, claiming that it would create a return to the loan production-driven environment that led to the financial crisis. Appraisers, real estate salespeople and lenders were accused of inflating appraisals during that time to achieve the numbers needed to close deals. They claim the current appraisal processes were put in place to provide safety to the investor of the loan and buyer of the property.
Many of the processes put in place in recent years, after the financial crisis, were to protect the government-backed securities and other investors. They actually took the consumer out of the process and, frankly, buyers simply began seeing the appraisal process as a necessary evil to get the loan.
Unfortunately, very few of them actually see the appraisal process as a protectionary process intended to keep them from paying too much for a home. In reality, that is exactly what the appraisal process should accomplish. It should be an independent opinion of value to manage the risk to the consumer in the homebuyer decision. Interesting enough, appraisals in the United Kingdom take place before the home is listed and the listing price is set.
J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).