A little over 10 years ago, California and nation suffered the greatest financial setback since the Great Depression of the 1930s. At the core of the Great Recession was deregulated mortgage securities that encourage high risk loans and inflating home prices that created unsustainable growth in the real estate market leading to a functional collapse of the real estate market causing hundreds of banks and business to fail and resulting in millions of Americans losing their homes to foreclosure. This was the legacy of the early 2000 deregulation of mortgages.
Now as we see home prices beginning to exceed the 2006 highs, no doc loans are reappearing in an effort to help more people qualify for loans, sub-prime lending options in places are on the rise again and now the FDIC and OCC have submitted to the Fed a proposed rule to eliminate the necessity of appraisals on certain home sales under $400,000. It is of course no surprise that most banks support this move while most consumer advocacy groups oppose this rule.
The argument from banks as adopted by the regulating agencies appears to be concerns over rising costs of loans and escrow services and the increasing amount of time it takes to close a mortgage loan. Further, the supporters rightfully point out that no adjustment to threshold values related to appraisals has been undertaken since 1994. While prices have certainly changed in the past 25 years the principals of due diligence have not.
Consequently, the opponents of the rule change have largely been appraisers and consumer groups. These groups point out that in the entire loan transaction process, appraisers are the most neutral disinterested group in the transaction. The operate in a fee for service industry and conclusions drawn by a neutral and detached appraiser generally are not subject to the approval of all parties. That is, the job of an appraiser is to complete an accurate analysis of the value of the property regardless of what parties are willing to spend. The appraiser makes a value determination with out the influence of a lenders potential return or the sellers or buyers emotional attachment to the home.
In theory this gives the market an accurate picture of value at a certain point in time to allow the market participants to determine through their own due diligence whether a transaction should be pursued. The banks argument to blame rising costs of loans and extended closing periods on the appraisal process in the sub-$400,000 marketplace discounts the myriad of other regulations in place. Escrow lengths are not in large part by a lenders due diligence related to a loan but rather revisions to RESPA and primarily TRID that have built in mandatory waiting or cooling off periods involving the purchase of real estate. Likewise the cost of appraisals over the years have barely changed. Appraisals have largely fluctuated in a range of $400 - $600 for more than a decade and unlike many other services the costs over the past decade don't appear to have changed that significantly. These arguments seemed misplaced when reviewing other regulatory schemes with a much broader impact on the lending process.
Ultimately, it appears likely that the Fed will approve this rule change (although it won't affect federally backed loans which require appraisals to be completed by agency rule). Assuming the change is made what does that mean to the real estate participants. Valuation will become a greater issue for buyers to review as part of their due diligence. Instead of a lender requirement for the appraisal, it will be buyers and maybe even sellers as part of a disclosure process to engage in valuation reviews. Rather than appraisers providing services through a bank, they will provide services to the private individual. As the law requires each party to undertake the due diligence it deems necessary to satisfy itself with a purchase transaction the valuation of a property will become one of those due diligence efforts of the buyer.
Times are certainly changing in this interesting real estate market.
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