Though the battle over de minimis standards for real estate loan appraisals may be lost for the moment, one of the principal lobbyists for the appraisers is confident there is potential to influence regulators to strictly enforce the appraisals reforms contained in the thrift bailout law.
"The fight over the $100,000 threshold isn't the real issue, "said Donald E. Kelly, vice president for government affairs in the Washington office of the Appraisal Institute. "The real issue is that collateral be valued appropriately."
Kelly made his comment after a half day of hearings before the Subcommittee on General Oversight and Investigation of the House Banking Committee, during which lenders, appraisers and regulators commented on implementation to date of the appraisal reforms required under the 1989 thrift bailout law. The regulators defended their decision to set minimum thresholds, the lenders said lower thresholds would increase costs to borrowers and appraisers argued that the higher thresholds were unnecessary and potential harmful to borrowers (see page 4 for appraiser and lender views).
"Bankers, appraisers and regulators agreed there must be a competent assessment of the value of collateral," Kelly said. "What is involved is how much a lender is willing to pay to reduce the risk. We think the marketplace can take care of that."
Kelly said the Appraisal Institute will continue to fight a Senate amendment that empowers the bank and thrift regulators to set minimum standards. That provision was attached to the Senate version of a bill (S. 2733) to regulate the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
Kelly noted that Federal Reserve Board Gov. John P. LaWare testified that, the Fed would revisit the issue if it determines its current rule proves to be a threat to the safety and soundness of the banks and bank holding companies it regulates, it would revisit the issue.
LaWare and the three other regulators who testified at the Sept. 16 hearing said they were convinced that the rules they adopted this year, which require the use of certified or licensed appraisers only on transactions of more than $100,000, were justified because of very low default rates on one- to four-family homes and the fact that losses were not caused primarily by faulty appraisals.
The regulators expressed confidence that the current law gives them the authority to set such standards. But they welcomed legislation that made such authority more specific.
The regulators were guarded when asked if they agreed with the American Bankers Association proposal to raise the threshold to $500,000 for commercial real estate. An Office of Management and Budget study released in August concluded there is no reason to do so at the present time.
The Fed has a $250,000 threshold for commercial real estate. The Office of Thrift Supervision, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency apply the $100,000 threshold to commercial real estate.
Jonathan L. Fiechter, deputy director for Washington operations for OTS, said there are different objectives involved in commercial and residential real estate appraisals.
The goal of the residential appraisal is to determine what value a property would have if it were foreclosed, he explained. A commercial appraisal seeks to determine if the income from a property will cover loan payments, he added.