Federal bank regulatory officials in recent testimony before Congress and in public presentations have signaled an intent to pursue proposals that would increase appraisal threshold levels and potentially establish new exemptions from appraisal requirements.
Federal Reserve Chair Janet Yellen told the House Financial Services Committee Sept. 28 that federal banking agencies have identified a need to reduce appraisal requirement burdens. The finding followed a review by the agencies of the Economic Growth and Regulatory Paperwork Reduction Act to find outdated, burdensome or unnecessary provisions. Among the issues identified were a need to streamline the Call Report, reduce examination frequency, raise long-standing dollar-based thresholds for appraisals and reduce the complexity of capital requirements for smaller banks.
Jerome Powell, governor of the Federal Reserve Board, mirrored Yellen’s comments in a Sept. 29 speech before the Conference of State Bank Supervisors where he indicated that efforts were underway to “reduce burden associated with our real estate appraisal requirements.”
The agencies are in the process of finalizing a report on their Paperwork Reduction Act findings, and any proposals would most likely follow shortly thereafter and could be released by the end of the year.
Another variable that may be addressed in future proposals is the qualification requirements for individuals performing evaluations. Earlier this year, the agencies released guidance on Supervisory Expectations for Evaluations. Evaluation quality is likely to be heavily scrutinized under any plan to reduce appraisal requirements.
The Appraisal Institute hosts an Appraisal Threshold page
devoted to this issue, in anticipation of proposals that would negatively impact safety and soundness.
The current bank regulatory environment has made portfolio valuation increasingly important and created multiple opportunities for valuation professionals to serve the financial sector, the Appraisal Institute reported Oct. 17.
The 2010 Interagency Appraisal and Evaluation Guidelines devoted an entire section to the issue, and this issue has been reemphasized in newly released guidance statements on risk management in commercial real estate lending. Portfolio valuation also is common amongst other financial institutions involved in real estate (pension funds, insurance companies).
Banks are obtaining a variety of valuations (appraisals and evaluations) in an effort to monitor portfolios and track loan performance. Given the different valuation methods being used, AI expects that bank risk management professionals may begin to ask questions about why they should give more credence to new evaluations than to older appraisals on file. When values are based on different valuation methods, trustworthiness cannot be measured on an apples-to-apples basis.
Banks and other financial institutions handle portfolio analysis in a variety of ways to address different policy and regulatory needs. This frontier is relatively new and rapidly evolving within banks, and there are no consistent or established best practices.
As a result, opportunities exist for appraisal professionals to develop forensic tools to evaluate values over multiple time intervals in an attempt to measure value change rather than just value. However, a growing concern is whether current practice standards combined with antiquated federal and state regulation may hinder appraisers from developing new analytical tools. These hindrances also may deter valuation professionals from trying to seize this opportunity to serve the financial sector.
Through its current advocacy efforts, including a call for additional standards recognition in specific states and modernization of the appraisal regulatory structure, AI is striving to proactively encourage appraisal professionals to seize opportunities to serve the financial sector.
The banking sector is on high alert as the Basel Committee on Bank Supervision expects to finalize its new accord (Basel IV) by the end of the year, the Appraisal Institute reported Oct. 17. The Second Consultation Document, which was released for comment in March, pays significant attention to real estate risk requirements, including real estate valuation.
The so-called “Basel Accords” are issued by the Bank for International Settlements and establish regulatory capital requirements that bank regulatory agencies around the world have committed to following.
For exposures secured by real estate, the accord proposes to use the loan-to-valuation ratio as the main driver for risk-weighing purposes, and to use a three-category classification (from less risky to risky) as follows:
General treatment for exposures secured by real estate where repayment is not materially dependent on rent/sale of the property;
A more conservative treatment for exposures secured by real estate where repayment is materially dependent on cash flows (i.e. rent/sale) generated by the property. Specialized lending (corporate) exposures assigned to “income-producing real estate” under the IRB approach would be classified under this category; and
A conservative, flat-risk weight for specialized lending real estate exposures defined as “land acquisition, development and construction” (i.e. loans for unfinished property that meet the definition of specialized lending).
The proposed accord also includes the most extensive commentary relating to real estate valuation of any current accord, and includes a provision directly relating to market value:
Value of the property: the valuation must be appraised independently using prudently conservative valuation criteria. To ensure that the value of the property is appraised in a prudently conservative manner, this value must exclude expectations on price increases and must be adjusted to take into account the potential for the current market price to be significantly above the value that would be sustainable over the life of the loan. National authorities should provide guidance setting out prudent valuation criteria where such guidance does not already exist under national law. If a market value can be determined, the valuation should not be higher than the market value.
These market value constructs appear consistent with current bank regulatory requirements in the U.S., with one exception. The “life-of-loan” concept is new to U.S. bank regulatory requirements and could be interpreted to include “long-term sustainable value,” which is found in accords used in other parts of the world, including Europe.
As noted, the Basel IV accords are expected to be finalized in the coming months. U.S. banking trade organizations such as the American Bankers Association
have called on banking regulatory agencies to release a notice of proposed rulemaking for any changes to the risk capital requirements to help avoid piecemeal application and increased complexity. Once finalized, expect implementation of Basel IV provisions in the U.S. to take considerable time.
The Internal Revenue Service on Aug. 4 issued a proposed rule
that would greatly impact estate and gift tax transfers where there are liquidations of partial interests. If adopted, the proposal would prohibit discounts of family-controlled entities, including limited liability companies.
The IRS is proposing to eliminate discounts for marketability and control from estate, gift and generation transfer tax treatment, which would have the practical effect of increasing the taxable amount of the estate/gift/transfer. Similar proposals have been found in recent administration budget requests, but where this proposed rule differs is in its utilization of existing regulatory authority under Section 2704 of the Internal Revenue Code.
The proposed rule has drawn attention on Capitol Hill, with various groups calling on Congress to take steps to curtail the proposal or take steps to prohibit it from being implemented. A couple of legislative proposals already have been introduced, and tax oversight committee leaders have indicated interest in halting the rule under a stand-alone bill, an appropriations rider or a disapproval resolution under a congressional review law.
Designated Members of the Appraisal Institute involved in tax valuation have reported strong demand for services because the proposed rule has set forth a series of unknowns for estate and trust tax planners.
“Politically, this has a long way to go, including a legal challenge when and if the regulation is adopted,” said Michael Zarefsky, former IRS Estate and Gift Appeals Officer and current estate tax attorney in California. “That would be years from now when an estate challenges the regulations.”
The AI Government Relations Committee has reviewed the proposed rule and sees the proposed changes as legal and tax issues and generally not valuation issues. AI is positioned to provide guidance on valuation issues arising from any final rule.
Comments are due Nov. 2.
Citing “a host of serious consumer protection concerns,” the Appraisal Institute joined 10 other trade associations to submit a letter
Aug. 16 to the U.S. Department of Housing and Urban Development and the U.S. Department of Veterans Affairs stating their opposition to recent changes to Property Assessed Clean Energy loans, known as PACE loans.
PACE loans allow local governments to provide financing for energy efficiency, renewable energy and water efficiency projects that building owners pay back through property tax assessments, according to the National Conference of State Legislatures.
“Our associations support responsible efforts to provide homeowners with affordable and accessible financing for energy efficient home improvements, and sounder alternatives to the FHA’s and VA’s new PACE guidelines already exist,” the groups wrote in the letter to HUD Secretary Julian Castro and Veterans Affairs Secretary Robert A. McDonald.
“We urge you to suspend the applicability of the proposed FHA and VA PACE guidelines and issue the proposal for notice and comment so that lenders, borrowers, home improvement providers, and others may be given the opportunity to comment and assist the departments in establishing policies that better protect consumers, lenders and taxpayers.”
On Sept. 30, the FHA released a revised Handbook 4000.1 implementing FHA PACE requirements. The revision states that in cases where the mortgagee determines the property will remain subject to a PACE obligation, the mortgagee must notify the appraiser and provide the appraiser with all terms and conditions of the PACE obligation. AI has the entire Handbook 4000.1 under review and intends to comment separately to FHA on enhancements that require further attention.
The U.S. Department of Veterans Affairs in July launched an appraiser recruitment drive to increase the size of its Fee Panel. The VA said it has openings throughout the country, but also is targeting specific counties and states identified in its recruitment flyer
To be considered, appraisers must have a minimum of five years’ residential appraisal experience and have at least two letters of recommendation from fee appraisers. Also, conflicts of interest must be avoided. For a complete list of requirements, visit the VA website
can be submitted online.
The Appraisal Institute on July 15 submitted a comment letter
to the Appraisal Subcommittee that was critical of the ASC’s lack of appraiser outreach prior to the release of a proposed rule on appraisal management company registration that could lead to increased costs to appraisers.
The proposed rule stated that the affected parties would be 400 to 500 active AMCs; however, AI estimated the rule will indirectly impact the 15,000 to 25,000 appraisers who work for AMCs as sole proprietorships. This number is the one that should be used for the Regulatory Flexibility Act. If a larger review had been performed, the ASC would have been more aware of the proposed rule’s financial impact on small businesses. AI also noted that the proposed rule lacks an estimated revenue projection. The ASC could receive a sizable windfall at the expense of small businesses.
In its comment letter, AI wrote, “Congress granted the authorization of AMC registry fees on the presumption of the development of a grant program to state appraiser regulatory agencies. To date, the ASC has chosen not to develop such a program.”
The letter further stated, “Absent a defined program that benefits consumers, the users of appraisal services and appraisal practitioners, we believe the ASC should establish a cap to the AMC registry fee.”
The ASC may release a final rule by the end of the year.
The U.S. Department of Housing and Urban development on Sept. 14 released new rules
on fair housing that list prohibited conduct and establish methods for evaluating claims of quid pro quo harassment and hostile environment harassment. The rule takes effect Oct. 14.
The rule applies to valuation professionals by prohibiting the use of an appraisal where the person “knows or reasonably should know that the appraisal improperly takes into consideration race, color, religion, sex, handicap, familial status or national origin,” as well as “conditioning the terms of an appraisal of residential real property … on a person’s response to harassment because of race, color, religion, sex handicap, familial status, or national origin.”
President Obama on June 22 signed into law the Indian Trust Asset Reform Act (ITARA) Public Law 114-178, which will provide Indian tribes greater self-determination in their business dealings.
Title III of the Act requires appraisals and valuations of Indian trust property to be administered by a single administrative entity within the U.S. Department of the Interior, which will establish minimum qualifications for individuals to prepare appraisals and valuations of Indian trust property and allow an appraisal or valuation by a qualified person to be considered final without being reviewed or approved by DOI.
DOI held listening sessions and established a public comment period before implementing the new law. The Appraisal Institute weighed in during the comment period and encouraged DOI to establish strong minimum requirements for appraisers (particularly in light of the lack of review) and to include standards obligations for any appraisals.