Fed Agencies Issue Property Evaluation Expectations for Banks

The issue that has been at the center of debate among banks for some time is whether or not property evaluations are sufficient substitutions for appraisals when determining the value of a home for real-estate-related financial transactions.

The federal banking regulatory agencies, including the Federal Reserve Board, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC), recently issued an advisory bulletin to identify expectations for the use of property evaluations by banks.

The agencies collective advisory for the industry addresses questions surrounding appraisals and evaluations that arose during outreach meetings held by the agencies last year pursuant to the Economic Growth and Regulatory Paperwork Reduction Act.

"Many questions pertained to the circumstances under which evaluations may be used in the underwriting of real estate-related financial transactions and how to support a market value conclusion when there have been few or no recent comparable sales," the advisory explained. "The federal banking agencies are providing this advisory to respond to those questions by describing existing supervisory expectations, guidance, and industry practice."

According to the advisory, an evaluation is not required to be completed by a state-licensed or state-certified appraiser or to comply with Uniform Standards of Professional Appraisal Practice (USPAP). Property evaluations can be done by a bank employee or by a third-party.

The person that conducts the evaluation must consider one or more of the real-estate valuation approach including the sales comparison approach, the cost approach, and the income approach.

"Regardless of the approach or method used to estimate the market value of real property, an evaluation report should contain sufficient information and analysis to support the value conclusion and the institution’s decision to engage in the transaction," the agencies stated.

Under the appraisal regulations, the agencies determined that the following transaction types do not require an appraisal, but do require an evaluation:

• Transactions in which the “transaction value” (generally the loan amount) is $250,000 or less;
• Certain renewals, refinances, or other transactions involving existing extensions of credit; and
• Real estate-secured business loans with a transaction value of $1,000,000 or less and when the sale of, or rental income derived from, real estate is not the primary source of repayment for the loan.

History has shown that homeowners typically value their homes at a higher price point than appraisers, but as the housing market evolves, these opinions are inching closer to reaching a point of equilibrium.

Quicken Loans' Home Price Perception Index (HPPI) found that homeowners valued their homes 1.75 percent more than appraisers in January 2016, marking a full year that this trend had continued. Last month, the gap between home values and appraisers was 1.80 percent.

“It’s always important to understand your local real estate market,” said Quicken Loans Chief Economist Bob Walters. “If home values are growing in the area, homes may be gaining equity faster than consumers realize. On the other hand, if the local market is struggling, the appraisers–who are most aware of home value changes–may recognize this before homeowners come to terms with reality.”

Click here to read the complete advisory note.