Cramdowns and refis won’t need appraisals

In November, the U.S. federal agencies which oversee the banking system proposed new guidelines for real estate appraisals.  One would imagine that these guidelines would be in keeping with the new more stringent regulatory frame of mind the financial services sector.  This is not the case.

In fact, the new proposal appears to entirely eliminate mandated written appraisals in connection with cramdowns, refis, and Fannie/Freddie loans.  The key verbiage is on pages 45-48 of the guidelines:

In general, renewals, refinancing, and other subsequent transactions may be supported by evaluations rather than appraisals….

An institution may modify the terms of an existing credit without obtaining a new appraisal or evaluation. Such modifications should not involve any advancement of new funds, any material change in the borrower’s creditworthiness, any change to the borrower’s or guarantor’s obligation on the credit, or any changes to the collateral pool or deterioration in collateral protection…..

This exemption applies to transactions that are wholly or partially insured or guaranteed by a U.S. government agency or U.S. government-sponsored agency. The Agencies expect these transactions to meet all the underwriting requirements of the federal insurer or guarantor, including its appraisal requirements, in order to receive the insurance or guarantee.

As you may recall, inflated appraisals were at the center of much of the recent house price inflation in the United States. Many appraisers complained that mortgage brokers and loan officers steered business to appraisers who inflated appraisals to meet mortgage loans. In some cases, there was outright appraisal fraud.

As a result, many in the housing industry are looking to Washington for leadership in creating a more robust regulatory framework to eliminate wrongdoing in housing and bring confidence back to the market. They are waiting in vain.

The American Society of Appraisers (ASA) has had a look at the new guidelines and is coming out against them in the most categorical way (Hat tip, Scott). If this issue is any reflection of Washington’s will to eliminate incentives for mischief, we are likely to be disappointed.

First, the guidelines came out in November with a statement that they were beefing up and clarifying guidelines in appraisals (see press release here). They requested comments on those guidelines.

Then, the ASA, having looked over the guidelines, released a statement on the 20th which roundly condemned the new guidelines. Their statement is below. Feel free to skim through this –  I have highlighted the salient points.

Our organizations have strong objections to what appears to be the dominant feature of the Guidelines – the exemption of more than a dozen categories of real estate related financial transactions from the professional appraisal requirements of Title XI of FIRREA. Although the November 19, 2008, Federal Register request for comment on the Guidelines states that they “are intended to clarify the Agencies’ real estate appraisal regulations and promote a safe and sound real estate collateral valuation program,” we have reluctantly concluded that they do neither.

We believe the approach to valuation issues reflected in the Guidelines is fundamentally flawed; and is inconsistent with the safety and soundness of bank regulatory reforms promised by the incoming Administration. As a consequence, we are unable to support them and respectfully urge that they be withdrawn and reconsidered so that our recommendations and the recommendations of other stakeholders can be carefully studied and significant revisions made to the current draft.

The Guidelines Fail To Promote Safety and Soundness:

Instead of promoting safety and soundness by increasing reliance on professional appraisals of real property collateralizing mortgages and mortgage-backed securities, the Guidelines have the unmistakable effect of sanctioning wholesale avoidance of such reliance. They do so in two ways: First, by directly and indirectly exempting multiple categories of transactions from the requirements for professional appraisals; and, Second, by explicitly sanctioning the use of automated valuation models (AVMs), broker price opinions (BPOs) and tax assessment valuations (TAVs) as acceptable “evaluation” substitutes for the fair market value opinions of professional appraisers. They are not.

For the reasons discussed later in this comment letter, these alternative valuation tools, by themselves, are too often unreliable indicators of the fair market value of property collateralizing loans made by federally insured financial institutions. We fail to understand why the bank regulatory Agencies, which are responsible for assuring the safety and soundness of our financial system and the integrity of the mortgage credit markets, have devoted so much time and attention to allowing regulated institutions to avoid the use of certified, licensed, tested and accountable valuation professionals for so many categories of mortgage-related transactions.

As a consequence of the many exceptions to and exemptions from reliance on appraisals, our organizations have concluded that the proposed 2008 Guidelines represent a step backwards; and that they erode, rather than strengthen, the public policy purpose of Title XI of FIRREA – which is to protect the safety and soundness of the deposit insurance funds and the mortgage markets by ensuring that real property collateral is reliably valued by individuals who are regulated by and accountable to, state appraiser licensing authorities and who have demonstrated a high degree of valuation competency by meeting or exceeding the education, training, experience and testing requirements established by the Qualifications Board of the nonprofit Appraisal Foundation.

The Guidelines Obscure Rather Than Clarify Supervisory Expectations:

Rather than clarifying the collateral valuation responsibilities of regulated institutions, the Guidelines actually raise as many questions as they answer. In large measure, this is because the lengthy narrative and extensive details necessary to describe and explain the numerous exemptions from Title XI’s professional appraisal requirements – and the occasional exceptions to the exemptions – create confusion and not clarity about the Agencies supervisory intentions. As a consequence, we do not believe that financial institutions, appraisers and other stakeholders will easily be able to determine when an appraisal is or is not actually required for a given transaction.

The Guidelines Ignore The Current Distress Of The Banking System And The Mortgage Markets; And The Importance of Reliable Valuations To The Government’s Mortgage Relief Programs :

Because we believe the proposed Guidelines minimize the relevancy of professional appraisers and professional appraisals to safe and sound mortgage loan underwriting, we would oppose them even during “normal” times. But, given the current stress on our mortgage credit markets, the large and increasing number of foreclosed or troubled mortgages, the rapid changes in the values of residential properties throughout the country and the many governmental programs designed to assist homeowners by modifying their mortgages, we find the Agencies’ preoccupation with authorizing exemptions from professional appraisals, particularly troubling

As a specific example, we believe the Guidelines are entirely out-of-sync with the government’s many programs to assist distressed homeowners. Our organizations enthusiastically support these programs but also recognize that their success is dependent, in some important ways, on accurate appraisals of the fair market value of collateral property (e.g., for loan-to-value purposes; to gauge the extent of possible losses to taxpayers if modified mortgages default; and to establish accurate current market value when a reduction in loan principal is part of the relief package). Yet, the Guidelines move in precisely the opposite direction. We address this point in some greater detail in the “Discussion” portion of our letter.

While We Generally Support Improvements Made By The Guidelines To The Performance Of Appraisals, We Urge The Banking Agencies To Recognize That The Improvements Could Cause Some Regulated Institutions To Rely Increasingly On Valuation Approaches Whose Requirements Are Far Less Rigorous – But Also Far Less Reliable:

While our organizations do not believe the Guidelines foster safety and soundness, we do generally support those provisions which address who can perform “appraisals”, the contents of appraisals and the independence of the appraiser. Regrettably, the improvements to the details of the Agencies’ Title XI appraisal requirements are greatly outweighed by the fact that far too many transactions are exempted from those requirements in favor of evaluations.

Moreover, we hope the Agencies recognize that the enhanced requirements pertaining to appraisals, while desirable, can have the perverse effect of causing regulated institutions to opt for far less rigorous valuation approaches, such as evaluations and evaluation alternatives (i.e., AVMs, BPOs and TAVs). It is our view that this potentially adverse consequence serves as a secondary, but still important, reason for the Agencies to severely restrict the categories of transactions that are exempted from appraisal requirements.

The Wide Latitude Provided Regulated Institutions With Respect To How Collateral Property Should Be Valued, Not Only Jeopardizes Safety and Soundness, It Also Represents A Highly Inefficient And Ineffective Way For The Agencies To Perform Their Regulatory Functions:

Because the Guidelines provide regulated institutions with so much discretion and so many options for determining how collateral property should be valued, regulatory efficiency will be an inevitable casualty. Although the Guidelines reflect a policy of providing regulated institutions with maximum flexibility on the tools available to them to perform collateral valuations, the Agencies also recognize that this almost limitless flexibility brings safety and soundness dangers. As a consequence, instead of adopting a policy which requires institutions to rely on professional appraisals as the preferred approach most likely to produce reliable fair market values, the Guidelines adopt a permissive approach, but simultaneously promise robust examiner oversight of the institutions’ valuation decisions; and task the institutions with establishing elaborate internal controls over their valuation policies. Apart from what we believe are the obvious safety and soundness advantages of relying on valuations by professionally credentialed and state supervised individuals, our organizations are convinced that reliance on state licensed and supervised individuals produces a far more effective and even cost-efficient federal regulatory scheme than one which permits financial institutions almost limitless discretion but which in turn produces a need for extensive banking agency supervision and expensive internal controls…..

We do not believe such scenarios lead to regulation which is either effective or cost-efficient;

The Guidelines Fail To Address The Responsibilities Of Appraisal Management Companies (AMCs) Relative To The Agencies’ Appraisal

Requirements: Requests by banks for appraisal services are increasingly being funneled through Appraisal Management Companies; yet, the Guidelines do not address whether or how the AMCs are responsible for assuring compliance with the Agencies’ appraisal requirements. This gap must be closed. We discuss this issue in somewhat more detail in the “Discussion and Questions” section of our comment letter.

There is much more to this story in the links below. However, the long an short of it is that the U.S. government is changing appraisal standards in a way that makes appraisers themselves uneasy.

This is not a good sign. Is the U.S. Federal Government trying to relax appraisal standards?

Agencies Seek Comment on Proposed Interagency Appraisal and Evaluation Guidelines – Federal Reserve Board website
Proposed Interagency Appraisal and Evaluation Guidelines (PDF) – FRB website
Memo: Proposed 2008 Interagency Appraisal and Evaluation Guidelines (PDF) – ASA Website

  1. Tom Lindmark says


    This is one of those things that, in my opinion, looks worse on its face than it is. I believe that most of this relates to a plan to allow rate and term refinances of Fannie and Freddie mortgages without an appraisal. FHA has been doing this for decades and actually pretty successfully. They call it their Streamline Mortgage product.

    When you stop to think about it, at this point in time and given the apparent commitment of the government to save as many homeowners as possible, what value is their in an appraisal if no new funds are advanced? You might as well let the guy that’s under water get a lower rate, it’s only going to give F&F a fighting chance to get the loan repaid. If he’s on the edge and can’t refi because the value isn’t there, you just end pushing him over the cliff.

    I have a lot of respect for appraisers and think most of them are quite good. In many respects they’re getting a bad rap for the current problems. But, they do have an economic incentive to resist this initiative.

  2. Edward Harrison says


    I have a more cynical take on this. I believe the Federal agencies are preparing for more direct control over the mortgage market either using TARP, the Fed’s infinite balance sheet and desire to buy up mortgages or Fannie and Freddie as vehicles. In my view, cramdowns, refis and GSE-related activity are areas where there will be a significant increase in activity. The policymakers know this and are preparing the way by greasing the skids.

    It is not a coincidence tht Bernanke is talking about buying mortgages or that cramdown legislation was recently passed into the stimulus bill. I know you are not in favor of cramdowns while I am. Nevertheless, I find it dubious that these types of guidelines are being used to make the government’s machinations easier. Ultimately, the downturn is temporary but the rules governing appraisals are not.


  3. SteveP says

    READ THE FINE PRINT. All this is saying is that a new appraisal is not required when the loan amount is not being increased or decreased. In otherwords, if a lender wants to reduce the interest rate or extend the term without increasing or decreasing the lien amount, no new appraisal is required. Why on God’s green earth would the ASA have an issue with this? The ASA should be more careful when selecting their society’s leadership!

  4. Joe Shwingding says

    The issue is the U$Gov’t thinks the problem is deteriorating home prices. They are wrong. Falling home prices are the solution to an overpriced real estate market. Housing costs reached unprecedented levels far beyond the buyers ability to pay.

    The idea of open transparency with this proposal does the exact opposite. This idea seeks to obfuscate real market value for these homes.

    Should they be successful in stemming falling home prices it will kill the RE market. For one simple fact that elevated home prices will lock out any new buyers which in turn stop the all-important move up buyer.

    1. Edward Harrison says

      Joe, I’m with you on this one. In the DC area, where I am, house prices are still s high that the mortgage is much more than the rent for the equivalent house. If you are sane person, why would you pay more to buy a declining asset? Homebuyers, especially first time buyers need an incentive. And the only incentive worth anything is low prices. This is exactly what is being resisted.

      Even Bill Gross is telling the Feds to stop the fall of asset prices, though (see this story here). So we may be fighting a losing battle.

  5. poolview says

    Goofs- this is for servicers so they can more easily modify loans, just like the ill-fate FHASecure. Otherwise, if you go to your local banker / broker, you need to originate a complete loan file.

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