Residential Appraisal Exemption Threshold Increased to $400,000
Written By: Joel Palmer, Op-Ed Writer
A new federal rule has been adopted that increases the appraisal threshold for certain residential real estate transaction from $250,000 to $400,000.
The rule was first proposed in December 2018 by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. It goes into effect once it’s been published in the Federal Register.
The rule was changed largely because the exemption threshold had not been increased in 25 years, during which home values have appreciated considerably. The joint statement from the agencies stated that “the change will provide burden relief without posing a threat to the safety and soundness of financial institutions.”
For transactions exempted from the appraisal requirement, the final rule requires institutions to obtain an evaluation to provide an estimate of the market value of real estate collateral. The rule states evaluations must be “consistent with safe and sound banking practices.” Even so, evaluations are generally less burdensome than appraisals and have been required since the 1990s.
Using 2017 HDMA data, the agencies noted that the percentage of exempted regulated transactions will increase from about 56 percent to 72 percent. The percentage of exempted transactions based on dollar volume will increase from 20 percent to 35 percent.
Why $400,000? Based on how inflation is measured, a house that sold for $250,000 in 1994 would sell for between $621,000 and $644,000 today. At the market’s low point in December 2011, a $250,000 house in 1994 would have sold for between $415,000 and $445,000. The agencies stated they “adopted a conservative approach” and used $400,000 based on the 2011 market low.
There was support from the industry for making the exemption threshold higher, keeping it at $250,000 and eliminating it altogether. Others noted that because of the difference in market values in geographic areas, there should not be a national threshold but one that varies based on market.
The agencies’ rule document stated that they received more than 560 comments related to the new rule.
Those that supported the change generally came from financial institutions, financial institution trade associations, and state banking regulators. Reasons supporting the change included:
The increases in real estate values since the previous threshold was established.
The cost and time savings to lenders and borrowers.
Evaluations are appropriate substitutes for appraisals.
Expedited valuations could make the residential mortgage market more efficient and lower closing costs.
Comments from appraisers, appraiser trade organizations, individuals, and consumer advocate groups generally opposed the proposal to increase the threshold. Their reasons included:
Appraisers serve a necessary function in real estate lending and bypassing them to create a more streamlined valuation process could lead to fraud and another real estate crisis.
The assertion that appraisers are the only unbiased party in the valuation process, in contrast to buyers, agents, lenders, and sellers, who each have an interest in the underlying transactions.
Rejection of assertions that there is an appraiser shortage warranting regulatory relief.
Several commenters questioned the proposal in light of the agencies’ previous decision not to propose an increase to the residential real estate appraisal threshold during the regulatory review process required by the Economic Growth and Regulatory Paperwork Reduction Act.
A few commenters also questioned whether the proposed threshold increase is consistent with Congressional intent, given that the rural residential real estate exemption was made available only to transactions meeting certain criteria, while the proposed threshold increase would exempt all residential transactions at or below $400,000.
In addition to increasing the threshold level at or below which appraisals are not required for residential real estate transactions, the final rule also:
Makes a conforming change to add to the list of exempt transactions those transactions secured by residential property in rural areas that have been exempted from the agencies’ appraisal requirement pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule requires evaluations for these exempt transactions.
Amends the agencies’ appraisal regulations to require regulated institutions to subject appraisals for federally related transactions to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.