Watering Down FRT Definition
- Watering Down FRT Definition - April 2, 2018
Definition of FRT simply does not reflect the majority of the mortgage lending environment…
So what exactly is a “federally related transaction”, or FRT for short?
Wait, that’s not the right question. Let’s start here: What is NOT an FRT?
It’s not a mortgage loan insured by the Federal Housing Administration. It’s not lending underpinned by the Department of Veterans’ Affairs home loan program. It certainly isn’t a loan that’s sold to a Government Sponsored Enterprise (or GSE), like Fannie Mae or Freddie Mac. Just considering a loan for sale to those two entities is enough to fall outside the scope of an FRT. And, of course, any loan beneath the $250,000 appraisal threshold amount.
Now that we’ve clearly stated what does NOT constitute an FRT, let’s answer the original question: An FRT is a mortgage loan whose total amount is above the $250,000 threshold, is not insured or guaranteed by a federal agency, and is not sold or contemplated for sale to a GSE such as Fannie or Freddie.
That doesn’t sound very “federally related”, does it? And more to the point, how many of these loans actually exist in the mortgage lending marketplace? The short answer to the second question is between 8-12% of all mortgage activity falls within the contours of an FRT. So what happened to the federal nexus with FRTs in the first place?
To answer that, one must look at the implementing regulations promulgated in 1994 by the federal banking agencies. Those rules created a number of exemptions from the definition on an FRT not for inherently nefarious reasons, but to address lenders’ concerns about a duplication of efforts when originating loans that were both considered FRTs under the original definition and also had to meet the requirements of either a federal insurance or guaranty program, or those of the secondary market as set by the GSEs. The exemptions were designed to make clear that where an agency or GSE had its own robust appraisal requirements, those would be controlling as they were (and still are) considered similar to the obligations imposed under Title XI of FIRREA.
As recently as 2010, the federal banking agencies emphasized that the 1994 exemptions only cover those transactions that otherwise meet the insurer/guarantor/GSE underwriting and appraisal requirements. This makes clear the point of the 1994 regulations – exemption does not mean waiver, but instead means a replacement regime exists that is no less rigorous than what Congress contemplated in Title XI in the first instance and can stand in the place of Title XI obligations.
No matter the intent of the federal banking agencies, though, there are unintended consequences that come with the 1994 exemptions. For starters, numerous state laws that followed FIRREA’s passage rely in part or in whole on the definition of a FRT to define who must have a license or certification, as well as the scope of a state’s enforcement program. So which definition is controlling for these purposes: The original definition as passed by Congress in 1989, or the one with exemptions under the 1994 regulations? This confusion has led state regulators to ask for clarification surrounding the matter, so they can either continue on with their program as designed or go to their legislature and seek the necessary technical corrections.
But the more troubling consequence of the 1994 exemptions is that they give federal agencies and, more pointedly, the GSEs an outsize amount of control over appraisal requirements for their purposes. In acting with FIRREA and in the wake of the savings and loan debacle of the 1980’s, Congress made two clear declarations to the lending community: First, that the value of the property on which they were making loans needed to be a primary factor in deciding whether to close a deal, and not a secondary paper for the file; and, Second, that those appraisals had to be performed by qualified professionals who followed standards. Even with the more recent housing finance crisis of the mid-2000s informing decisions in this arena, we’re seeing today a move by the GSEs to eliminate appraisals on a range of purchase money and refinance mortgages – loans that may likely fall within what Congress originally intended to capture as an FRT, but that was carved out in 1994.
Time will tell if this pivot winds up being a fulcrum for the next housing finance meltdown, but one thing is clear: The appraisal requirements that Congress intended to impose on mortgage lenders with FIRREA simply don’t exist anymore, between the watering down of the FRT definition and, just as critically, the fivefold increase in the appraisal threshold amount. By letting those with a direct financial interest in the transaction have the latitude to rewrite the rules as they see fit for business purposes, we lose sight of the very safety and soundness principles that are supposed to undergird the mortgage lending market in the first place – recognizing both its outsize influence on the economy as a whole, and the fact that buying a house is the single largest investment most Americans will ever make.
Conversations on how to find the healthy middle on appraisals are happening in Washington with growing regularity, as we try to get out of the constant regulatory/deregulatory swings that come with the boom-bust nature of the housing market. But it’s clear from any perspective that, as currently constituted, the definition of FRT simply does not reflect the majority of the mortgage lending environment.
The fox is guarding the chicken coop!
Admittedly its before my morning coffee and Im not at my sharpest, but what I read certainly doesn’t gybe with wheat I have been taught…not unless we are playing at semantics. Even then I’m skeptical. Another article written for April Fool’s Day?
Like I said, no coffee yet so I’ll take the first definitions that pop up (State of Georgia):
What is a Federally Related Transaction?
The determination of whether or not an appraisal assignment involves a federally related transaction is important to Georgia appraisers for two reasons:
1. only licensed or certified appraisers may perform an appraisals to be used in federally related transactions and
2. those appraisals must comply with the Uniform Standards of Professional Appraisal Practice (USPAP).
Georgia’s Appraisal Act [43-39A-2(12)] and the act of Congress that established the regulation of appraisers in the United States — Title XI [12 U.S.C. 3331-3351] in SEC. 1121. Definitions [12 U.S.C. 3350(4)] — define a federally related transaction as any real estate related financial transaction which
1. a federal financial institutions regulatory agency or the Resolution Trust Corporation engages in, contracts for, or regulates; and
2. requires the services of an appraiser.
Real Estate Related Transactions
Title XI [12 U.S.C. 3350(5)] also defines a real estate related transaction as “any transaction involving:
1. the sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof;
2. the refinancing of real property or interests in real property; and
3. the use of real property or interests in property as security for a loan or investment, including mortgage-backed securities.”
Therefore, in determining whether an assignment is a federally related transaction, an appraiser must begin by answering two questions. First does the appraisal involve the transfer of an interest in real property, the financing or refinancing of a transfer of an interest in real property, or the use of an interest in real property as security for a loan or for mortgage-backed securities.
Second, does the financial transaction for which the appraisal assignment is to be performed involve a federal financial regulatory agency or one of the agencies specifically named in Title XI that require the services of a licensed or certified appraiser.
Federal Financial Regulatory Agencies
Title XI identifies the following agencies as federal financial regulatory agencies:
(A) the Board of Governors of the Federal Reserve System (In addition to the 12 member banks, the Federal Reserve has regulatory authority over state-chartered banks and bank holding companies);
(B) Federal Deposit Insurance Corporation (FDIC) (In addition to insuring the accounts of depositors in member banks, the FDIC regulates savings banks and state-chartered banks that are not members of the Federal Reserve System);
(C) Office of the Comptroller of the Currency (OCC) (The OCC regulates more than 2,500 national banks all across the U. S.);
(D) Office of Thrift Supervision (OTS) (The OTS regulates the nation’s savings and loan or thrift institutions); and
(E) National Credit Union Administration (NCUA) (The NCUA insures the accounts of depositors in federally chartered credit union and regulates those institutions).
~scratching my head~ “OK, worth coming back for later.” Maybe a TWO cup moring.
John, what’s your position on diminimis, avm’s, hybrid appraisals, middle management companies, and this new trend of originators and management companies getting to dip into the appraisal fee with no restriction, for their own operational expenses?
Great Article John. So many appraisers don’t really understand what FRTs are. Many times some have suggested to do away with AMC regulations to prevent amc’s from operating in their state. If this would actually happen, it would be business as usual and worse.
I’m sorry but its 2018. Why is anyone wrestling with definition changes between 1989 and 1994 today?
So, I’m thinking (an I might be wrong) that the purpose of the article was to decry the lose of work volume for residential appraisals?
If I’m wrong, I apologize.
If I’m correct, somebody email me, I have the info for a “current” article on this matter, including the current Federal citations.
Just post it! Inquiring minds want to know.