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December 2018

Fed agencies propose upping threshold for appraisals

Up to 40 percent of home sales could be exempt from appraisals if a new rule is enacted.

On November 20, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Insurance Corporation proposed a rule that would raise the appraisal threshold for residential real estate transactions from $250,000 to $400,000.

The appraisal threshold was last increased in 1994. At that time regulators raised it from $100,000 to the current level of $250,000.

The rule proposed by the federal regulators would only affect Federally Related Transactions overseen by the agencies. Residential real estate transactions covered by the Fair Housing Administration, the U.S. Department of Veterans Affairs, the U.S. Department of Agriculture, Fannie Mae, and Freddie Mac would still be subject to those entities' appraisal requirements.

In the notice of proposed rulemaking and request for comment, the agencies stated, "Consistent with the requirement for other transactions that fall below applicable thresholds, regulated institutions would be required to obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices."

Regulators say evaluations providing an estimated market value of real estate could be "less burdensome" than appraisals because such evaluations are less detailed and costly than appraisals and need not be prepared by state licensed or certified appraisers. They also said the move is in response to "concerns raised about the time and cost associated with completing residential real estate transactions."

The move could provide relief from appraisal requirements "without posing a threat to the safety and soundness of financial institutions," stated the FDIC.

According to data provided by the FDIC, the agencies estimate that increasing the appraisal threshold by $150,000 (from $250,000 to $400,000) would have exempted an additional 214,000 residential mortgages at regulated institutions from the agencies' appraisal requirement in 2017; that number represents three percent of total HMDA originations.

Last year, around 750,000 transactions were exempted from the appraisal requirement, which represented about 56 percent of the total. Lifting the threshold to $400,000 would have expanded that number by 16 percent (an additional 214,000 sales), according to an analysis by the FDIC.