Lynn Woosley is a Senior Director with Treliant. She is a seasoned executive with extensive risk management experience in regulatory compliance, consumer and commercial credit risk, credit and compliance risk modeling, model governance, regulatory change management, acquisition due diligence, and operational risk in both financial services and regulatory environments.
Read the Government Accounting Office Report Real Estate Appraisals: Most Residential Mortgages Received Appraisals, but Waiver Procedures Need to Be Better Defined
- Source: gao.gov
Treliant knows mortgage lending and credit risk. If your financial services institution needs assistance with assessing your mortgage appraisal and appraisal waiver practices, we can help.
In a recent report on appraisal waivers to the Chair of the Committee on Financial Services Committee of the House of Representatives, the Government Accounting Office (GAO) noted that exercise of appraisal exemptions permitted under Title XI is relatively infrequent. Approximately 70 percent of the nearly 7 million mortgages originated by regulated lenders during 2018 and 2019 were eligible for an appraisal exemption. Despite eligibility for an appraisal exemption, approximately 85 percent of the homes securing these mortgages were appraised. Because of the limited use of appraisal exemptions
First, the GAO noted that legitimate reasons to prefer appraisals can be a barrier to exercise of appraisal exemptions. For example, an independent estimate of a home’s market value can help a home buyer avoid overpaying for a property.
For lenders, an appraisal can mitigate the risk of loss if the borrower defaults. Appraisals are also used in complying with regulations. For federally related transactions requiring an appraisal, federal banking regulators limit the ability to rely solely on automated valuation models (AVMs) unless the resulting evaluation meets all supervisory requirements and is consistent with safe and sound banking practices and associated supervisory guidelines.
Second, appraisals also may be needed meet standards set by investors that purchase mortgages in the secondary markets. Both Fannie Mae and Freddie Mac typically require appraisals of the residential real estate securing the mortgages they purchase. Similarly, the Department of Veterans Affairs, the Federal Housing Administration, or the Department of Agriculture Rural Housing Service typically require an appraisal as a condition of guarantee.
Third, the GAO found that the regulations and guidance related to appraisal waivers promulgated Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council (FFIEC) lacks sufficient specificity. The regulations do not define key terms, such as appraiser scarcity or significant delay, and do not include standards for determining when these conditions exist. The GAO recommended the ASC establish appropriate definitions and standards for objectively determining when conditions are appropriate for appraisal waivers.