Barnard: Regulators Watering Down Appraisal Requirements
The author of the appraisal requirements of the 1989 thrift bailout law said regulators are creating rules that would water it down.
The lawmaker, Rep. Doug Barnard, D-Ga., is preparing to intervene.
"Congress needs to take control," Rep. Barnard said. "We can't have the trade groups taking control of what's happening."
At issue are more than half the nation's residential mortgages and numerous small land transfers, worth between $50,000 and $100,000.
Cost Is an Issue
Bankers argue that requiring licensed appraisers to rule on those deals will drive up costs for millions of homebuyers and other borrowers who can least afford the expense.
They also want to exempt transactions between $100,000 to $500,000 from the more stringent certified commercial real estate appraisals.
Rep. Barnard has argued that exempting small loans from careful appraisals would put the banking system at risk of losses similar to those that decimated the thrift industry.
The lingering dispute over details of the two-year-old thrift reform law underscores the kind of mine field the government must cross to implement more hotly contested bank reforms that Congress is contemplating today, such as broad underwriting powers for banks.
"Now all of a sudden the same people who never did endorse the program, who caused the S&L debacle, want to liberalize the program," Rep. Barnard said, referring to the regulatory agencies that failed to insist on competent real estate appraisal by thrifts.
If the current House draft of bank reform legislation, with strong firewalls between banking and underwriting activity, is passed, it could be subject to similar "squabbling" among trade groups for years, Rep. Barnard said.
The appraisal requirement will be a big part of the Georgia congressman's legacy after he retires from the House next year.
After years of trying, he attached to the Financial Institutions Reform Recovery and Enforcement Act of 1989 a requirement for state certification of appraisers who work for federally insured financial institutions.
He cited studies that linked 75% of thrift failures to inadequate, sometimes fraudulent real estate appraisals.
Caught in the crossfire between bankers and appraisers, regulators seem to be leaning toward a banker's preference for less scrutiny.
Initially, the Federal Reserve Board, which regulates bank holding companies, set its threshold for licensed appraisals at $50,000.
But when other banking agencies set their thresholds at $100,000, the Fed issued a proposal to match them. The comment period ended last January but the Fed has yet to act.
Since then, both the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have put out proposals to lift their thresholds to $100,000.
The OCC's comment period ended last month, and the FDIC will be accepting comments until Nov. 18.
Bankers have raised a legitimate question as to whether the smaller loans pose a safety-and-soundness problem, said Robert F. Miailovitch, the FDIC's representative on the appraisal subcommittee of the Federal Financial Institutions Examinations Council.
The Office of Thrift Supervision has passed a rule mandating a $50,000 minimum for appraisals, and staff members are contemplating whether to propose a change.
Aggressive letter-writing campaigns have been mounted, and comments are running about 4 to 1 in favor of the higher threshold, based on a review of about 650 comments received at the OCC, said John Rasmus, senior administrative counsel of the American Bankers Association.
Bankers insist the prospect of certification requirements for appraisers have already driven up the cost of commercial appraisals by thousands of dollars each, and that licensing of appraisers for the smaller transactions will increase the cost of those loans as well.
"Appraisals can be a significant amount of the cost of a small deal, so raising the threshold could be helpful," said Mark A. Willis, president of Chase Community Development Corp., a unit of Chase Manhattan Corp.
Appraisal Termed Redundant
In addition to raising the threshold, he said, regulators should exempt municipally subsidized deals from appraisal requirements, since an appraisal would merely repeat the analysis done by the municipality.
But appraisers say now is the wrong time for loose underwriting on home loans, given recent increases in delinquencies.
"Defaults are on the rise at all levels, including the $50,000 to $100,000 range," said Donald E. Kelly, vice president of Washington operations for the 36,000-member Appraisal Institute.
|Good for the Taxpayers'
The idea of the law is to make appraisers "more accountable" for their work, should losses occur. "It's good for the banks. It's good for the consumers and ultimately it's good for the taxpayers," Mr. Kelly said.
The appraisers say licensing for residential appraisals entails only two weeks of training and 2,000 hours of related experience, far less than certification for bigger, commercial appraisals.
So the cost of complying with the law will remain under $375 per loan. That's far less than is charged for attorneys fees, points, and other closing fees, the appraisers say.
Rep. Barnard said he was scheduled to address a regulatory committee on appraisals Thursday.
In addition, he and Rep. Carroll Hubbard Jr., D-Ky., are mulling a joint hearing of their respective subcommittees to air the arguments on the proposals, which also include exempting mineral, timber, and cropland sales from the requirement.
"I think we need to listen, but no one has proven to me that we don't need licensed or certified appraisers," he said.
President Bush recently took the banks' side on the appraisal issue when he advocated a higher appraisal threshold in his list of proposals to regulators to spur credit.
"The President is wrong," Rep. Barnard said. "Why is making bad loans helping the credit crunch?"