Raising the appraisal threshold – implications and evaluations - by Bill Pastuszek

The de minimis level under which appraisals are not required recently was increased from the long established threshold of $250,000. 

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.”

For transactions below the threshold, evaluations are required. These not-quite appraisals can be undertaken by non-licensed appraisers. The good news is that 1-4 family construction lending is not affected. 

This change represents a clear opportunity for technology-driven valuation services provided to banks by opportunistic players in the market. This could have an effect on appraisers’ practices and market share. Appraisers have had a long running uneasy relationship with evaluations. While USPAP has provided mechanisms – and effective ones – through which appraisers can undertake evaluations, they haven’t really caught on. Most appraisers are worried about violating USPAP by performing evaluations. My sense is that appraisers’ reluctance is more based on moving outside of their comfort levels and, further, quite possibly, a failure in understanding the flexibility built into USPAP. 

Some observers note that allowing more evaluations encourages a turning back to practices that aided several banking crises, where appraisal and risk management were pushed away in favor of meeting competitive goals. Smaller institutions – which are less likely to have appraisal departments  –  and institutions in low density areas of lower values (that fall below the threshold) are going to be more prone to the effects of a higher threshold and having appraisal independence compromised. 

While upward revision of the threshold was probably long overdue – the writer always thought the rule should have been based on some relationship to regional values and not an across-the-board requirement, many areas of the country may have the safety and soundness of the banking system under potential threat in a downturn. We are far into a long real estate expansion; some cracks are beginning to show. Attention should be paid to keeping commercial real estate lending under adequate control and scrutiny.

Worrisome is the proposed increase in the threshold for appraisal exemptions for non-residential real estate transactions from $250,000 to $1 million by the National Credit Union Administration (NCUA). Evaluations would still be required.

Boston is one of the most expensive real estate markets in the country; the change in the threshold should have little effect in the Metro, mostly. (More on this in a later column.) Outside the metro area, where values are dramatically lower, e.g., in Western Massachusetts, those economies are much less sturdy and the increased threshold has potentially negative consequences.

There is so much competition between lenders for loans in the current environment, with many aggressive lenders tempted to “roll the dice,” The result is sacrificing loan quality to “fill the pipeline.” Appraisals are an effective way to reign back potential lending excesses. Shouldn’t appraisals be done by appraisers, then? The answer seems obvious.

Bill Pastuszek, MAI, ASA, MRA, heads Shepherd Associates, Newton, Mass.