NCUA follows bank regulators’ lead on home appraisals

After raising the threshold for appraisals on commercial real estate transactions earlier this year, the National Credit Union Administration is now moving forward on a proposed rule to up the limit for residential loans.

The NCUA board on Thursday unanimously voted to approve a proposed rule that would raise the bar under which appraisals are not required for residential real estate deals from $250,000 to $400,000. The vote opens a 60-day public comment period on the proposal.

But while Todd Harper, the board’s junior member, voted in favor of the proposal, he said he views the prospect of a higher residential appraisal threshold “with some skepticism and real doubt.” Indeed, with the warning signs of a recession seemingly just over the horizon, “we may be loosening standards at the wrong time,” Harper added.

This is the second time Harper been skeptical of changes to the agency’s appraisal rules. In July, Harper voted against a controversial rule that boosted the appraisal threshold for commercial real estate loans to $1 million, twice as high as the limit for banks. Chairman Rodney Hood and board member J. Mark McWatters voted in favor of the higher commercial real estate appraisal threshold. Both also voted yes on the residential proposal.

While bankers blasted NCUA for its action on CRE appraisals, they’re unlikely to raise a similar ruckus about a $400,000 threshold for residential loans, since their regulators implemented an identical limit in September.

The threshold for banks had been set at $250,000.

The Appraisal Institute, which opposed NCUA’s measure boosting the CRE limit to $1 million, also objected to the move increasing the residential threshold for banks.

For deals under $400,000, NCUA’s proposed residential appraisal regulation would require a written estimate of a property’s market value prepared by a qualified, experienced individual. Harper, however, noted oversight of written estimates is far less rigorous than that of appraisals.

Moving to put residential appraisal policies closer in line with bank regulators is part of an ongoing trend at NCUA. Harper spoke during his confirmation hearing about the need for consistency with other federal regulators and recently proposed a measure that would add additional oversight for large, complex credit unions.

NCUA’s proposed residential appraisal regulation would require a written estimate of a property’s market value prepared by a qualified, experienced individual. Harper, however, noted oversight of written estimates is far less rigorous than that of appraisals.

He recounted an incident where he received an unsolicited written estimate of his home’s value just weeks after he purchased it. The estimate, which was prepared by a local agent, reflected a 10% increase.

“The Arlington market might be hot, but it’s not that hot,” he quipped.

Harper also urged agency staff to consider limits on the use of automated valuation models in preparing written estimates, as well as a provision making it easier for borrowers to transfer an appraisal from one lender to another in any final rule.

If NCUA ultimately approves the increase in the residential appraisal threshold, it would be just the third time the limit has been raised and the first since 2002, when the existing $250,000 limit was put in place.

About 77% of real estate loans by credit unions are exempted from appraisal requirements under the $250,000 threshold, according to NCUA. Raising it to $400,000 would result in approximately 94% of transactions being exempt, based on analysis of recent data reported under the Home Mortgage Disclosure Act.

According to McWatters, if NCUA had indexed its residential threshold to either the Case-Shiller or Federal Housing Finance Agency home price index 17 years ago, it would sit above $450,000 today. Accordingly, a $400,000 limit “is not a radical change,” he said.

“There seems to be confusion appraisals are the Holy Grail,’ McWatters said. “They’re not. They’re a snapshot [of a property’s value] at a given point in time.

“I think we can put a little too much value on appraisals,’ McWatters added.

The Credit Union National Association, National Association of Federally-Insured Credit Unions and National Association of State Credit Union Supervisors all back the increased residential appraisal threshold.

Second chances

In other business, the board unanimously approved a policy statement that should make it easier for people convicted of minor offenses to find work in credit unions. The move comes five months after Hood authored an op-ed calling for a review of the industry’s hiring practices. A month later, the board asked for comments on plans to expand exceptions to employment restrictions.

The Federal Credit Union Act prohibits individuals convicted of criminal offenses involving dishonesty or breach of trust – as well as other low-level criminal offenses – from working in credit unions. Individuals that fell into these categories were required to obtain written permission from the board before being hired.

The new policy widens considerably the list of offenses exempted from hiring restrictions. Convictions involving insufficient funds of “aggregate modest value,” small-dollar simple theft, false identification and simple drug possession are no longer covered, as are minor offenses committed by young adults.

“This adjustment is not only about regulatory relief, but also it is simply the right thing to do,” Hood said.

Harper and McWatters credited Hood for championing the issue.

“I thank the chairman for bringing this to the board for our consideration,” McWatters said. “We live in a very puritanical society in many respects. These small indiscretions stay with you, like an albatross around your neck.”