Commercial Appraisal De Minimis Proposal
Proposal To Increase The Appraisal Threshold On Commercial Real Estate Loans
The Federal Financial Institutions Examination Council’s Joint Report to Congress said the federal banking agencies are developing a proposal to increase the threshold for requiring an appraisal on commercial real estate loans from $250,000 to $400,000.
The report did not propose changes to the current residential real estate threshold of $250,000.
In addition, the agencies recognize that appraisals can provide protection to consumers by helping to assure the residential purchaser that the value of the property supports the mortgage amount assumed. Overall, the agencies believe that the interests of consumers are better served when appraisal regulations are coordinated among government agencies.
ICAP believes that increasing the appraisal threshold levels could have a negative impact on safe and sound real estate lending practices and opposes a threshold increase.
Read ICAP’s comment letter on the appraisal threshold Issue below:
Dear Sir or Madam:
The Illinois Coalition of Appraisal Professionals (ICAP) was established in 1994 to be a unified voice for real estate appraisers in the state of Illinois. On behalf of our 1,500 members, we appreciate this opportunity to comment on the review of existing regulations regarding “Appraisals: Standards for Federally-Related Transactions” under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) (Docket ID: FFIEC-2014-001).
As you know, real estate appraisals are not currently required for federally regulated real estate transactions below a transaction value of $250,000 for residential mortgage loans and business loans less than $1 million in transaction value that are not dependent on income from the rental/lease of the property for repayment of the loan. ICAP encourages you not to adopt any action that would increase the current appraisal thresholds levels.
No evidence exist that raising the appraisal thresholds would increase the safety and soundness of real estate lending practices; in fact, ICAP believes that raising the appraisal thresholds would have a negative impact on the safety and soundness of real estate lending practices.
According to the Illinois Association of Realtors 2015 Annual Report on the Illinois Housing Market, there were 155,676 sales of residential properties in Illinois in 2015, with a median sale price of $173,000 (31% below the current $250,000 appraisal threshold for residential mortgage loans).
In addition, of the 10 Illinois metropolitan statistical areas (MSA) studied, not one exhibited a median sale price that met or exceeded the current $250,000 appraisal threshold (median prices ranged from $87,700 in the Decatur MSA to $210,000 in the Chicago MSA). This data parallels the Government Accountability Office’s (GAO) testimony in 2012; which reported that between 2006 and 2009; more than 70% of all mortgage transactions fell below the current $250,000 threshold. As the significant majority of mortgage transactions in Illinois do not currently meet the existing appraisal threshold; ICAP sees no reason to have the thresholds increased.
Increasing the appraisal threshold levels would negatively affect safety and soundness of real estate lending practices, and likely prompt many financial institutions to significantly reduce attention to collateral risk management. Such inattention to collateral risk contributed to the recent catastrophic economic decline; an event the Agencies are charged to ensure will not be repeated.
The appraisal threshold has been increased twice since its inception; however, at this point in time there is absolutely no justification to raise the thresholds from their current levels. In order to maintain and promote prudent risk management as well as safety and soundness policies, ICAP recommends that the Agencies continue to operate with consumer protection as its prime directive and urge the agencies to resist any calls to increase the appraisal thresholds in order to safeguard the integrity, safety and soundness of the U.S. banking system.
Thank you again for this opportunity to comment.