The Appraisal Institute and the American Bankers Association provided sharply differing views during testimony last week before the Subcommittee on General Oversight and Investigations of the House Banking, Finance and Urban Affairs Committee. Here are excerpts of the trade groups' conflicting views on several topics.
De Minimis Threshold
ABA: The ABA and our member banks have consistently supported the establishment of a threshold below which the use of state-licensed or certified appraisers would not be required. The federal bank and thrift regulatory agencies have established this level at $100,000. The reduction or elimination of this threshold would have a severe, negative effect upon the cost and timeliness of appraisal service as well as the availability of qualified appraisers. ...
The establishment of a threshold level relates to whether or not a state-licensed or certified appraiser must appraise the real estate in question. It is not an issue as to whether the financial institution should appropriately evaluate the real estate. The federal banking agencies' regulations require that banks have an appropriate evaluation of property complying with the agencies' real estate appraisal guidelines regardless of whether this evaluation is performed by a state-licensed or certified appraiser. ...
Retention of the current threshold level would have no safety and soundness implications for commercial banks. Again, these transactions must be supported by an adequate evaluation of the real estate performed by competent individuals who do not have a direct involvement in the specific transaction. In terms of the research of the federal banking regulatory agencies and from information obtained from bankers throughout the country, it is abundantly clear that losses associated with real estate loans in the range of $100,000 and below caused by inadequate, faulty or fraudulent appraisals is statistically insignificant. Losses on loans in this range historically relate to other factors such as underwriting problems associated with the creditworthiness of the borrower, failure to adequately protect the bank's interest in the collateral and economic problems associated with particular regions of the country. The instances in which a faulty appraisal contributes to losses associated with lending activity are minimal and of such a nature that the imposition of the costs and delays associated with requiring state-licensed or certified appraisers for the $100,000 and below transaction range would in no way provide any public benefit. Eliminating this threshold would be a classic example of regulatory overkill; mandating additional costs, delays and paperwork without any safety and soundness or consumer benefits.
Appraisal Institute: A $100,000 threshold will allow many mortgage lenders to eliminate their traditional practice of requiring a professional appraisal for transactions below this amount. This practice would place federal insurance programs at risk and could lead to substantial monetary losses to those programs.
... It is clear that billions of dollars of losses from the S&L debacle involved single family residential property. In 1986, the Consumer Affairs Subcommittee estimated that 10% of the total savings and loan losses, which will likely reach more than $300 billion, stem from residential appraisal problems. The Mortgage Insurance Companies of America has also reported substantial losses associated with routine residential transactions. In 1989, the members of MICA paid 57,000 claims totaling $872 million, the majority of the losses occurred on properties valued less than $100,000.
With a $100,000 threshold, more than half of the home sale transactions in the United States would lose the protection of a qualified appraisal. Using recent figures cited by the American Bankers Association, the median price for existing homes is $102,000 and for new homes is $120,000. A $100,000 de minimis threshold would exclude above 50% of new and existing homes from the requirements of Title 11. ...
These regulations go into effect at a time when the residential real estate market is troubled. Mortgage delinquency rates continue to rise according to the Mortgage Bankers Association's national delinquency rates survey for the second quarter. The national delinquency rate is 4.77%, up a quarter of a point since last quarter. Foreclosure rates also remain high. MBA stated that the delinquency rate would have been even higher without the sharp decline in mortgage rates and the resultant refinancing surge. Only a year ago, the delinquency rate was a five-year high of 5.28%. VA loans experience a national delinquency rate of 6.73%, up a half point and FHA loans 7.31 %, up over a half point. (Note, VA and FHA loans traditionally have higher delinquency rates and lower loan amounts as these programs are often employed by buyers who might not meet all qualifications of conventional loans.) The Southeast is experiencing an upsurge in delinquencies with more than 7% for the region. Obviously, more residential loans are at risk in today's depressed markets.
ABA: In response to the mandate of the Federal Deposit Insurance Corporation Improvement Act of 1991 that the Office of Management and Budget conduct a study of the appropriateness of a separate de minimis level for commercial real estate loans, OMB met with ... bankers to solicit information on the validity of such a separate de minimis level. In support of the anecdotal information provided by the ABA and member banks, the ABA's Surveys and Statistics Division conducted a survey of some 2,800 banks selected by region and type of commercial real estate lending. This survey focused on issues relating to the availability of appraisers, the validity of the existing threshold level, the costs associated with real estate appraisals and the commercial real estate loan loss experience by loan size. The results of this survey provide dramatic evidence that there is no significant loss experience on commercial real estate loans at or below $500,000. Loss rates are not significant until the loans exceed this amount. Among four classes of commercial real estate loans, only loss rates on construction and land development loans showed any tendency to rise with loan size, but even here the increase was most significant above $500,000. For farmland, multifamily and nonfarm, nonresidential loans there was no reported consistent tendency for loss rates to rise until the loan size exceeded $500,000. ...
This survey is a good indication that in the case of commercial real estate transactions the existing threshold level has no safety or soundness implications for commercial banks. It also supports the desirability of increasing this level at some point up to $500,000.
Appraisal Institute: The risks may be even greater in the commercial area. In a Congressionally mandated study of a commercial de minimis, the Office of Management and Budget estimates that 45% of all commercial transactions would be exempted under the present threshold.
The report also notes that commercial transactions carry greater risks due to default rates that are 5 times higher than those experienced in the residential lending. The report states: "The importance of an appraisal increases with the riskiness of the transaction. Therefore, appraisals by certified or licensed appraisers should be particularly valuable for commercial real estate lending, which tends to be more risky than residential lending."
A recent listing of troubled real estate asset rates by individual state compiled in the FDIC Quarterly Reports as of March 31, 1992, highlights the troubled times in the real estate industry. For example, 16.38% of total real estate assets in the state of New York are considered troubled. Similar problems exist in other states, including California (8.05%). Texas (8.37%), New Jersey (11.81%), Arizona (9.44%), Connecticut (11.27%), Louisiana (10.60%) and Maryland (8.62%). Many banks across the country have already been significantly weakened by poor real estate portfolios. Every effort must be made to assure safe and sound lending practices or the American taxpayer will be left with yet another bill to pay.
Given these statistics and the current condition of the Bank Insurance Fund, there is no justification for the financial institutions to relax their underwriting standards and do without sound appraisals for real estate loan transactions below $100,000. Further, it is incorrect to assume that transactions below $100,000 have not led to substantial losses for banks under federal jurisdiction and do not pose a systemic threat to the national banking system. A $100,000 de minimis not only threatens the very foundation of the economy, but threatens the American dream - that of owning a home.
ABA: At the same time, this survey raises additional concerns as to the availability of appraisers, the time involved in completing appraisals and the increasing costs associated with these appraisals. It is highly likely that given current problems with the availability of appraisers such difficulties will increase after Dec. 31, 1992.
We believe that this problem will be experienced on a local and/or regional basis with particular problems in rural areas. It is important to remember that the availability of licensed or certified appraisers is not determined solely by the gross number of licensed and certified appraisers on a nationwide basis by the number of such appraisers available to serve markets in specific regions of the country.
The ABA recommends that Congress be vigilant in recognizing problems in the availability of licensed or certified appraisers along with delay and costs associated with real estate appraisals subsequent to Dec. 31, 1992. If these problems become significant and cannot be satisfactorily addressed by the temporary waiver authority granted to the Appraisal Subcommittee, then Congress might have to intercede to provide adequate relief to all participants in the appraisal process.
Appraisal Institute. Groups have questioned the nationwide availability of state-licensed and certified appraisers to appraise real estate ...
There are more than 60,000 appraisers licensed and certified already, with more each week. Full implementation is still four months away. Thus, claims that shortages will occur are premature. The ASC has adequate authority to provide waivers should states require relief.
Conducting the survey of appraisal costs mentioned above, CFA found no evidence of appraiser shortages.
In summary, the survey also provides substantial indication that full implementation of the FIRREA regulations will not create shortages in the supply of qualified appraisers. Also, the OMB study found no supportable evidence and considered any judgments to be premature as Title 11 was not fully implemented. Twenty-three states with Title 11 requirements in place have reported no problems.