Rule Change Lets Regulators Delay Appraisals On Some CRE Deals

Three major U.S. financial regulatory bodies have released an interim rule that will allow banks to delay property appraisals, in some cases for as long as 120 days after the closing of a mortgage on the property.

The rule, which applies to residential and commercial transactions, will be in effect until the end of 2020, the Federal Reserve, the Federal Insurance Deposit Corp. and the Office of the Comptroller of the Currency said.

"The agencies are providing this relief to allow regulated institutions to expeditiously extend liquidity to creditworthy households and businesses in light of recent strains on the U.S. economy," the rule states.

Restrictions on movement have complicated the property appraisal process, the rule says. "As a result, some borrowers may experience delays in obtaining funds needed to meet immediate and near-term financial needs,” it says.

The rule doesn't cover all real estate loans and only applies to banks overseen by the Fed or the two other agencies. It only applies to loans that banks keep in their own portfolios. 

Loans sold to or guaranteed by the FHA, HUD, the Department of Veterans Affairs or either of the GSEs will still require an appraisal before closing, as specified by each of those entities' rules, HousingWire reports.

Some agencies have already relaxed appraisal rules, including allowing exterior-only appraisals or appraisals based on public records or other third-party data, HousingWire reports.

The National Credit Union Administration, which regulates federally insured credit unions, is considering allowing a delay of 120 days of appraisals for loans originated by credit unions.

The rule also excludes transactions for "acquisition, development, and construction of real estate."

Appraisal Institute Director of Government and External Relations Bill Garber explains that the language "acquisitions, construction and development," refers to a specific loan type. That type, an ACD, is sometimes quite risky, and is generally used to acquire and develop land for subdivisions.

As for making loans while delaying appraisals, there is some risk in that as well.

"Banks will need to be careful, particularly in a potential rapidly declining market, Garber said. "It would not be wise to simply paper the file, for sure."

Toward that end, the rule says that banks should make "best efforts to obtain a credible valuation of properties" before the loan closing, and underwrite loans consistent with each agencies' standards for lending.

"The agencies also expect institutions to develop an appropriate risk mitigation strategy if the appraisal or evaluation ultimately reveals a market value significantly lower than the expected market value,” the rule states. 

The rule will be official when it is entered in the Federal Register. It is currently open for comments.