ALEXANDRIA, Va.–By a 2-1 vote, the NCUA board has approved a final rule that increases the threshold level below which appraisals would not be required for residential real estate-related transactions to $400,000 from $250,000.
The rule is not interim, it is final, having been put out for comment by the agency in November of 2019. It marks the first increase in the threshold since 2002, when it was raised from $100,000.
Board Member Todd Harper cast the dissenting vote, saying more work should be done around real estate automated valuation models (AVM), which he said have proven too often be inaccurate.
The new thresholds approved by NCUA are now consistent with the thresholds other banking agencies have put in place on appraisals.
“Consistent with the requirement for other transactions that fall below applicable appraisal thresholds, federally insured credit unions (FICUs) will be required to obtain written estimates of market value of the real estate collateral that is consistent with safe and sound practices instead of an appraisal,” NCUA said.
According to NCUA staff, the agency received 27 comment letters on the proposal, 22 of which were in support, while five opposed the increase. Most of the opposition came from the appraisal industry, staff said.
Based on 2018 year-end data, the new appraisal threshold would exempt 94% of the $78-billion in first mortgages made by credit unions.
“This final rule is prudent and strikes the right balance for credit unions, their member-owners and the NCUSIF,” said NCUA Chairman Rodney Hood. “Credit unions have consistently expressed their support for the increase.”
A Vote Against
Board Member Harper said his opposition is based partly on the fact the new threshold increase is not in response to the COVID-19 pandemic emergency, where he said the agency should be focused.
“With this rule we are putting the proverbial cart before the horse,” said Harper. “There are no established AVMs standards. The estimates produced by AVMs may contribute to (incorrect) valuations. When we considered this in the fall I noted my concerns around the lack of precision around AVMs. Only half of AVM estimates are within 10% of the sales price.”
Harper said Congress raised concerns around the quality of AVMs when passing the Dodd-Frank Act.
“Nearly 10 years have passed since Dodd Frank, and while there have been some interagency discussions about the AVM standards in recent months, regulators have moved at a glacial pace on rulemaking,” said Harper.
Noting 94% of residential mortgages under the proposal would be exempt from the rule, Harper said the figure is “excessive” and “far from what Congress intended.” He noted the GAO is conducting a study of AVMs and he called for a delay until its work is done.
“Rather than rush to loosen this standard in the wake of a dramatic economic downturn, we should wait on that independent analysis,” he said.
Harper said licensed appraisers are faster to adjust to downturns in the market than are ATMs, and that before finalizing any rule NCUA should provide training to its examiners on how to better understand market estimates related to real estate.
Adjusting for Inflation
Board Member J. Mark McWatters said he recognized the concern being raised, but that by not raising the threshold NCUA is putting credit unions at a competitive disadvantage relative to banks, and that in and of itself could create a safety and soundness issue.
“But to me, most importantly, when I look at the $250,000 threshold, if in 2002 it had been indexed to inflation in the Case-Schiller index, it would be $457,952. It if had been indexed to the FHFA, the threshold would be $451,000. So, from an inflationary perspective, the $400,000 number seems a bit low.
Additional information is here.
NASCUS Response
In response, NASCUS CEO Lucy Ito said, "We applaud the NCUA board’s decision increasing the threshold level below which appraisals would not be required for residential real estate transactions. Increasing the threshold from $250,000 to $400,000 creates parity between credit unions and banks, which is consequential for competitiveness and safety and soundness. Credit unions have historically taken a conservative approach to lending and voluntarily seek appraisals for transactions below the thresholds to mitigate risks to both their members and their operations.”
NAFCU Response
In response, NAFCU EVP/General Counsel Carrie Hunt said, "“We thank the NCUA board for raising the appraisal threshold for residential real estate loans to $400,000. As safe and sound lenders, credit unions have proven time and time again that they do not engage in the same risky lending practices as banks. Given credit unions’ strong history of always putting their members first, this rule will ensure they are not unfairly disadvantaged in the marketplace.”