Should We Raise the Deminimus to $2 Million?
Bank regulators are nearing a decision to raise residential real estate transactions appraisal threshold to $400,000 from $250,000, for certain transactions.
Perhaps it should be set to $2 Million, or $5 Million.
It strikes me that we have two separate taxpayer regulatory/administrative/quasi-governmental organizations working in opposition. On one hand we have the Appraisal Subcommittee and The Appraisal Foundation (TAF), and 50+ state organizations attempting to regulate, license, and control the education of appraisers. USPAP, (Uniform Standards of Professional Practice) is promulgated by the Appraisal Standards Board (ASB) of the TAF. USPAP compliance is required for federally related transactions. USPAP comprises two parts:
1) Integrity Standards, (such as ethics, record-keeping, and competency) and;
2) Performance Standards (such as credibility, errors of omission/commission, or careless/negligent work).
On the other hand, we have the OCC, the FRS Board, and the FDIC, proposing to eliminate the requirement for appraisals below these levels. Any valuations could then be performed by individuals not subject to USPAP, performing ‘Evaluations’ (not requiring a state-licensed appraiser). The reasons given for raising the threshold are:
1) Evaluations are generally less expensive than appraisals;
2) Evaluations can be completed faster;
3) Last year there was a “shortage” of appraisers in a couple of states for a while.
So, taxpayers are paying for these opposing intents. One to improve public trust and economic security, the other one to reduce bank or borrower costs (Perhaps as much as $100 – $200 per house).
To simplify this discussion, let’s note two facts: Appraisers can perform ‘evaluations’, normally using the same scope of work as an unlicensed “evaluator”. What’s the difference? It appears to me that there is one key difference. The question is then: Which part of the service is not required? Is it the integrity/ethics, or the performance (such as using the right data and analysis)?
It appears to me that since unlicensed persons can charge less, have less tax/fee burden (for licensing, education, and errors/omissions insurance) the less ethical, less responsible ‘evaluator’ can always outbid the licensed appraiser every time.
So, what would happen if we simply raise the deminimus threshold to say $2 Million? Licensed appraisers could still be used for all levels of work. The only criterion left would be clear: What is the integrity and performance level of the person doing the valuation?
Wow! Only the integrity and good practice? Why, what would happen? Banks would again have to make all collateralloan decisions on the basis of the competence and ethics of the valuer. What a concept!
What a throwback. We would go back to the days before “the great recession”. Banks would have to evaluate the competency, ethics, education, experience, and perhaps even the professional associations and designations (such as the MAI, SRA, ASA, ARA, CRE…). What a throwback.