The National Credit Union Administration (NCUA) may change its regulations regarding appraisal thresholds on commercial loans. The current NCUA appraisal rule requires an appraisal on nonresidential loans larger than $250,000. The proposed rule increases the threshold by four times to $1,000,000. This would have a large impact on the amount of loans requiring appraisals. This follows the 2018 decision by the FDIC to increase the threshold for appraisals from $250,000 to $500,000.
According to Stephen Wagner, MAI, SRA, AI-GRS – the current President of the Appraisal Institute – this is a dangerous precedent. Mr. Wagner recently wrote an article published on AmericanBanker.com dealing with this NCUA proposal. He states that roughly 2/3 of commercial loans written by credit unions would no longer require appraisals. He also argues this could create an arms race with the FDIC following the NCUA to the same $1,000,000 threshold.
To think that in the near future, 2/3 of commercial loans will not require appraisals is a scary thought. On the surface, this appears it could have a gigantic impact on the appraisal industry as lenders have traditionally been the largest users of appraisal services. This is because lenders order appraisals to ensure that their loan portfolio is appropriately collateralized. It is in the public’s interest to have properties properly valued. We run the risk of repeating events of the past decade (the Great Recession) if they aren’t.
It is important to note that with this NCUA proposal, for loans under the proposed threshold that do not require an appraisal, the requirement for credit unions to obtain a written estimate of market value of the real estate collateral is still in effect. This estimate must be “consistent with safe and sound lending practices”. This quote was taken from the request for comment of this proposal by the NCUA.
There has been a common refrain in recent years from banks and credit unions that there are just not enough appraisers to effectively handle the demand of the lenders. While most appraisers would argue that this is not true, it is also necessary to look at the source of these arguments.
The real estate markets have seen a prolonged cycle of increasing values. Given this prolonged cycle, lenders do not believe that they need an appraisal to begin with. In most lenders’ minds, there are two possible outcomes of the appraisal:
The Appraisal Institute is working hard to fight these legislative changes that have been proposed in recent years. The reality may be that the appraisal industry needs to evolve. Our job as appraisers is to serve the needs of our clients, and our largest client base is telling us that in many cases, we are not providing enough value in the process.
In my mind, there are two ways that the appraisal industry can evolve. The first possible solution is to offer more valuation products. Appraisals always have been, and always will be, the gold standard for valuations. However, as is becoming clear, lending institutions do not believe that they always need an appraisal. By nature, appraisal reports should create the most well-supported opinion of value. However, they can be expensive and time-consuming. Given the current markets conditions, lenders are not excited to pay for full appraisal reports.
Over the last several years, evaluations have become a hot topic in the industry. This is the lenders’ way of saying they need a valuation, but they do not require a full-blown appraisal report. There are several reasons that a lender may want an evaluation or a restricted appraisal report. One reason is that the lenders consider the loan low risk. This could be due to a low loan-to-value, or a strong borrower. In these cases, lenders are confident in the loan, but need a valuation to maintain safe and sound lending practices.
According to USPAP, all appraisers can perform restricted appraisals. However, restricted appraisals still include the record keeping rule. This essentially means that an appraiser needs to complete the same level of research and analysis whether they are completing an appraisal or a restricted appraisal, but the difference is in the amount of information that is reported.
Evaluations are not bound by USPAP. Therefore, condensing research is an option depending on the scope of the assignment. Depending on the needs of the client, this can be appropriate. However, many states do not allow appraisers to complete evaluations.
Just because appraisers can’t perform evaluations in many jurisdictions does not mean they are not being completed. It just means that they are being performed by people who are less qualified than appraisers. This is a problem that needs to be rectified, and the Appraisal Institute is trying to address this by getting the Alternative Valuation Standards approved in many states. To find out more, reach out to your local Appraisal Institute Chapter.
The second solution is by embracing technology and becoming as efficient as possible. If appraisers can streamline the process of the appraisal and spend time on the analysis, rather than all the minutiae that comes along with the appraisal, then they will able to produce more appraisal reports in the same amount of time and improve their quality of work. This is the most immediate solution to improve the industry. Realquantum is the best solution on the market for streamlining your appraisal process, and you can see firsthand by scheduling a demo.
This proposed NCUA appraisal rule is a sign we need to be looking for ways to evolve in our industry. We need to find new ways to add value to our clients and prove our worth. Embracing technology and offering the products that our customers request is vital. Without it, we will continue to see organizations like NCUA and the Mortgage Bankers Association seek alternatives to using appraisers.
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