The banking industry wants the Federal Deposit Insurance Corp. to lead a lobbying effort directed at easing appraisal standards for residential loans sold in the secondary market.
In a July 16 letter to the agency, the American Bankers Association said the FDIC should try to persuade the Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association to modify their standards requiring appraisals for all residential mortgage loans.
The FDIC and the other banking agencies propose changing their regulations by, among other things, raising their thresholds for mandatory appraisals to $250,000 from $100,000. But this change would have relatively little effect unless the secondary market rules are adjusted.
"A major portion of the residential real estate market is not affected by the proposed increase in the threshold level." the ABA said. The trade group supports the increase to $250,000 but warned that additional work would have to be done to persuade Freddie, Fannie, the Department of Housing and Urban Development and many individual states to loosen their appraisal requirements.
Meanwhile the country's largest trade group, the National Association of Realtors, has weighed in with its view that the bank agencies shouldn't change their residential appraisal thresholds.
"If the proposed role is adopted, federal financial institutions would become the hiding place for residential real estate loans that cannot withstand a professional appraisal or conform to typical quality-directed underwriting standards," NAR said in a July 16 letter to the FDIC.
The group added, There also is the question whether the proposed rule would give a residential loan market advantage to federally insured financial institutions over other lenders who require appraisals. We believe there should not be an incentive for borrowers to forgo loans [that could be] purchased by the secondary market."
NAR said it backed many of the proposed revisions, including an increase in the threshold for commercial loans.
"Factually, it has not been demonstrated that residential appraisals impose a significant cost or that there is presently a shortage of appraisers." the group said. "With a $250,000 threshold, most residential loans held by federally insured institutions would escape the risk analysis and proper valuation provided in an approval."
NAR acted, in part, because many of its members are appraisers, and the appraisal industry strongly opposes the changes.
The appraisers are one of the only groups in the country to benefit from the S&L fiasco. The 1989 thrift bailout law greatly expanded their role in real estate lending, and they are fighting hard to keep the agencies from raising the regulatory threshold for mandatory property appraisals.
The appraisers have retained Manatt, Phelps & Phillips, a powerhouse law firm with close ties to the Clinton administration, to argue their case and have warned that the agencies are on thin ice in their efforts to raise the current residential threshold.
The banking agencies contend that the regulatory burden study required under the 1991 banking law. the FDIC Improvement Act, provides evidence showing the need to raise the threshold.
But Manatt, Phelps, & Philips, writing on behalf of the Appraisal Institute, warned that the agencies are violating the Administrative Procedures Act by not citing specific factual evidence from that study to support the proposed revision.
"Although the agencies repeatedly allude to the ~experience' and ~beliefs' upon which the proposed rule is grounded, our review of the rule making dockets reveals that the agencies to date have not placed in the record any facts, data or other substantial evidence supporting those beliefs and claims of experience," the law firm said.
In a thinly veiled warning about future legal action, the letter said that "in the absence of such materials from the rule-making records, affected entities are denied a meaningful opportunity to comment on the agencies's proposed rule."
The law firm demanded that the FDIC produce any statistics it has on hand to support its proposal and extend the comment period for another 30 days.
By July 21, two days after the comment period on the proposal had closed, the FDIC had more than 1,700 pages of letters and reports on file with more on the way. Since the enactment of FDICIA, bankers have learned the value of writing comment letters as a way of blunting regulatory action and have gotten into the habit of writing them by the hundreds.
But the bankers may have met their match, as the files are full of letters from appraisers warning of the dire consequences of changing the existing regulations.
"If the threshold is increased from $100,000 to $250,000, I absolutely guarantee that the S&L crisis will appear to be nothing as compared to the ~can of worms' that this administration and the future ones with face," wrote appraiser Dan Tosh of Byron, Calif.