The Appraisal Institute’s Washington office, which monitors Capitol Hill activity that’s important to valuation professionals, provided updates Oct. 19 on a few noteworthy items:
GSE reform. Legislation to reform the government-sponsored enterprises has not been introduced in the House or Senate because both chambers are focused on other priorities, such as flood insurance and Dodd-Frank fixes. While there was a Senate hearing on Fannie Mae and Freddie Mac in June, GSE reform likely will take a back burner to tax reform, and the issue might not see any action until early 2018.
Appraisal regulatory modernization. The Appraisal Institute continues to push for modernization of the U.S. appraisal regulatory structure, highlighting for Congress the benefits of one-stop-shopping for appraisal licenses and renewals. Currently, institutionally employed appraisers (which account for roughly 8 percent of licensed appraisers) must navigate a labyrinth of license application processes that even include background checks in some states — even for temporary practice permits. A nationwide licensing platform would dramatically reduce the regulatory burden for basic license application and renewals for both appraiser practitioners and institutions employing appraisers.
Federal role in appraisal. The Appraisal Institute clarified its position on the federal role in appraisal, stating that it has not proposed eliminating a federal role altogether, suggesting instead that the role should be that of a backup authority or a last resort. AI believes that state appraiser regulatory agencies would carry out licensing processes as they have for the past two decades and that these efficiencies will help reduce the layering effect that foists costs and obligations on practitioners.
The House Committee on Financial Services included appraisal in its oversight plan, and AI continues to hear talk about the committee possibly addressing appraisal issues later this year or early next year.
House panel passes third-party appraisal bill.
The House Committee on Veterans Affairs on Oct. 12 passed HR 3561
, legislation that gives VA appraisers the ability to rely solely on information from approved third parties — such as an appraisal trainee or property inspector under the direction of a VA appraiser — when determining a home’s value for a VA loan. The bill’s sponsors reportedly intend for it to address timeliness issues with some appraisals in rural areas.
The Appraisal Institute in a letter to bill sponsors
recommended a different approach. AI suggested that, instead of allowing third-party inspections, the VA should be more aggressive in recruiting appraisers to address timeliness issues. AI also recommended the legislation be tightened to “support the use of appraiser trainees over non-appraiser property inspectors, and for the program to be limited to its intent of dealing with rural appraisal situations.”
Next up for HR 3561 is a vote on the House floor, but no date is set.
High-volatility commercial real estate.
The House Financial Services Committee on Oct. 12 approved HR 2148
, legislation to clarify and reform Basel III High Volatility Commercial Real Estate rules issued by the federal bank regulatory agencies relative to acquisition, construction and development loans, known as ADC loans.
HR 2148 would help ensure that HVCRE requirements are appropriately calibrated and do not impede credit capacity or economic activity. The bill would exclude from the definition of HVCRE ADC loans any commercial real property projects in which the loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio as determined by the appropriate federal banking agency and where the borrower has contributed capital of at least 15 percent of the real property’s appraised “as-completed” value to the project in the form of cash, unencumbered readily marketable assets, paid development expenses out of pock or contributed real property or improvements.
The Notice of Proposed Rulemaking would replace the current HVCRE rule with a newly defined exposure category called high-volatility acquisition, development or construction. The proposal aims to simplify the capital treatment of ADC loans by expanding the number of ADC loans subject to a higher capital charge while reducing the size of the capital charge for covered loans from 150 percent to 130 percent. Despite the lower capital charge, some banks may be required to carry more capital for ADC loans than what is currently required. Whether the new approach results in simplification remains to be seen.
Regulators are soliciting comments on whether the new approach is workable and appropriate. Comments are due within 60 days of the NPR being published in the Federal Register.
The Appraisal Institute on Sept. 6 joined with nearly three dozen appraiser organizations in asking Congress to call on the Federal Housing Finance Agency to prevent Freddie Mac and Fannie Mae from issuing appraisal waivers.
The government-sponsored enterprises recently announced plans to no longer require appraisals for first purchase loans, as well as for mortgage refinancing. The Appraisal Institute is among 35 appraisal groups seeking to prevent FHFA from implementing the appraisal waiver program until the GSEs can demonstrate that the program:
Is consistent with safe and sound operation of Freddie and Fannie;
Does not bring harm to the consumer, especially the affordable housing sector;
Is properly monitored by FHFA and tested with independent appraisals; and
Integrates proper safeguards to prevent fraud.
In a letter
to the chairs and ranking members of the Senate Banking, Housing and Urban Affairs Committee and the House Financial Services Committee, the Appraisal Institute wrote, “We recognize that the Enterprises have, since 1994, been exempted from appraisal requirements established by Congress on the basis that their requirements exceeded those established by Congress and that they would continue to make responsible decisions. These new programs call this privilege into question.”
The Appraisal Institute warned of an “arms race” between Freddie and Fannie that would result in “a race to the bottom in terms of due diligence.”
“Unlike an earlier policy change by Fannie Mae, which addressed mostly refinances where previous appraisal information is likely available, first purchase transactions by the Enterprises carry higher risk from a property information standpoint,” the Appraisal Institute told Congress. “It is standard underwriting practice to obtain a complete interior inspection appraisal for first purchase transactions in order to better understand the potential risk associated with a property condition, which is more likely to change between subsequent sales than between refinance transactions.”
The Appraisal Institute noted, “It has taken many years for the mortgage finance sector to recover from the financial disaster in 2008-09, but progress has been made. The significant progress is due in large part to the employment of fundamental risk-management activities, such as the requirement for the completion of full appraisals to determine the true equity position of individual properties. Reducing appraisal requirements sends the wrong signal to mortgage loan sellers about the importance of fundamental risk-management practices and the need to continue to employ strong underwriting guidelines to avoid the costly mistakes of the recent past.”
The Appraisal Institute offered some suggestions to Congress and to the FHFA: “At a minimum, the Agency should request the estimates of the number of loan purchase and refinance transactions that would be subject to the new programs and make those estimates public for comment by affected stakeholders and other experts.”
“Further, as your Committee develops housing finance reform legislation, we ask that any legislation ensures that the Enterprises’ appraisal requirements enhance their safe and sound operation so long as the Enterprises remain in conservatorship or otherwise present potential risks to taxpayers and homeowners.”
What you can do? AI is asking its professionals to contact Congress to urge them to prevent the Federal Housing Finance Agency from letting Fannie Mae and Freddie Mac implement appraisal waiver programs until there’s proof the programs are consistent with safe and sound operations.
AI talking points regarding the appraisal waivers are available online
, as is a directory of senators and representatives.
The White House and Republican leaders of the congressional tax writing committees on Sept. 27 released the “Unified Framework for Fixing Our Broken Tax Code,” which outlines proposed tax reform plans.
The plans were developed by officials referred to as “the Big Six,” a group that includes Senate Majority Leader Mitch McConnell (R-Ky.); Senate Finance Committee Chairman Orrin Hatch (R-Utah); House Speaker Paul Ryan (R-Wis.); House Ways and Means Committee Chairman Kevin Brady (R-Texas); Treasury Secretary Steven Mnuchin; and National Economic Council Director Gary Cohn.
The framework, which still lacks significant details, likely would impact real estate in multiple ways.
Changes for individuals would involve:
Doubling the standard deduction for married and single filers;
Eliminating most itemized deductions but retaining tax incentives for home mortgage interest and charitable contributions. The framework does not specifically mention state and local tax deductions, which likely are at risk; and
Eliminating the estate tax.
Changes for businesses would involve:
Limiting to 25 percent the maximum tax rate applied to the business income of small and family-owned businesses that are operated as sole proprietorships, partnerships and S corporations (collectively referred to as “pass-through” entities). The tax-writing committee would define business income and small and family-owned businesses;
Reducing the corporate tax rate to 20 percent and moving toward reducing the taxation of corporate earnings;
Allowing immediate write-off or expensing for at least five years of the cost of new investments in depreciable assets other than structures made after the date of the proposed framework document; and
Maintaining low-income housing tax credit.
The business section also states that special tax regimes exist to govern tax treatment of certain industries and sectors and indicates that the framework would modernize these rules to ensure the tax code better reflects economic reality and eliminates opportunities for tax avoidance.
Changes that address global competitiveness involve:
Ending incentives for offshoring operations by treating foreign earnings that were accumulated overseas under the old system as repatriated and replacing the current structure with a 100 percent exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10 percent stake; and
Taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.
Many real estate companies operate under LLC arrangements, so they potentially could benefit from a reduced tax rate. On the other hand, reduced corporate tax rates might give corporations some pause in evaluating conversion to real estate investment trusts. Further, service industries, including real estate appraisal, should pay close attention to the applicability of the pass-through rate of 25 percent, as administration officials implied that it might not apply to professional service firms.