Federal Agencies Approve Rule Doubling Appraisal Threshold for CRE
The Federal Deposit Insurance Corporation on March 20 approved a final rule that will double the appraisal threshold for commercial real estate transactions. The Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System are expected to adopt the rule soon.
The federal banking regulatory agencies maintained the $250,000 threshold level for one- to four-unit single family residential loans. They also maintained the $1 million threshold level for business (owner occupied commercial real estate) loans.
“The agencies should be applauded for their restraint and focus on safety and soundness in residential and business lending,” Appraisal Institute President James L. Murrett, MAI, SRA, said.
The agencies’ final rule stated, “The OCC, Board and FDIC (collectively, the agencies) are adopting a final rule to amend the agencies’ regulations requiring appraisals of real estate for certain transactions. The final rule increases the threshold level at or below which appraisals are not required for commercial real estate transactions from $250,000 to $500,000. The final rule defines commercial real estate transaction as a real estate-related financial transaction that is not secured by a single 1- to 4-[unit] family residential property.”
“It excludes all transactions secured by a single 1-to-4 family residential property, and thus construction loans secured by a single 1-to-4 family residential property are excluded.”
“For commercial real estate transactions exempted from the appraisal requirement as a result of the revised threshold, regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices.”
Murrett acknowledged that the agencies’ decision to increase the commercial real estate threshold levels was not unexpected. However, he said, “It is confounding given pricing and risk management concerns expressed about the commercial real estate market by leaders of the agencies themselves. Without a doubt, the final rule increases risk to the commercial real estate lending system.”
Murrett noted that as more evaluations are allowed, one likely result is a return to the loan production-driven environment seen during the leadup to the financial crisis, where appraisal and risk management were thrust aside to make more – not better – loans. He said that smaller institutions, in particular — which are less likely to maintain appraisal departments — are more likely to be susceptible to breakdowns in appraisal independence with fewer controls in place.
“Seen through the lens of loosening regulations, the final rule may make sense,” Murrett said. “But from a safety and soundness perspective, the final rule raises significant concerns.”
He also noted, “A key takeaway from the agencies’ decision is that it increases the importance of modernizing the appraisal regulatory structure, including positioning appraisers to better offer evaluation services. Appraisers need to be nimbler in today’s marketplace — not only to compete, but to help maintain safety and soundness of the real estate financial system.”