Why credit unions need a higher appraisal threshold for mortgages
Since I assumed the chairmanship at the National Credit Union Administration over seven months ago, I’ve made reforming outdated regulations one of the agency’s top priorities. On November 21, the NCUA took another positive step forward with a proposal to raise the appraisal level for residential mortgage loans.
Under current regulations, any residential real estate transaction of $250,000 or more requires a licensed or certified appraiser to appraise the property before a credit union can issue a mortgage loan. This appraisal threshold was last raised in 2002.
But in the ensuing 17 years, the housing market has experienced increased demand, tight supplies, and increasing home values. The median price for existing home sales in 2002 was $170,800; as of the second quarter of 2019, that figure was $285,300.
This means that a far larger number of properties now exceed the residential appraisal threshold. As a result, this unnecessary regulatory burden increases costs for lenders and borrowers, while adding delays to real estate transactions.
In response, the NCUA board approved for public comment a proposal to raise the minimum threshold for residential real estate appraisals to $400,000. This a reasonable, common-sense adjustment that will benefit both lenders and borrowers by lowering costs and reducing the time needed to complete residential lending transactions.
As with other regulatory reforms, this was not an issue we approached lightly. We carefully studied market conditions, assessed industry norms and consulted with stakeholders to determine the appropriate way to proceed. That due diligence meant that we could move forward with confidence that this reform would not compromise the safety and soundness of the credit union industry.
First, we examined the thresholds that other federal banking regulators require for residential real estate transactions. Our peer agencies finalized the $400,000 threshold for residential property appraisals earlier this year. So raising the threshold for credit unions simply puts them on equal footing with other industry lenders.
The higher threshold has also received a positive assessment from the Consumer Financial Protection Bureau, which determined that the $400,000 residential real estate threshold “provides reasonable protection for consumers” purchasing homes. The CFPB’s assessment gave us an additional level of confidence that the higher threshold is prudent for credit unions.
We also took into account the fact that many credit union residential mortgage loans are made under federal or state guarantee programs like the Federal Housing Administration, Department of Veterans Affairs, Rural Housing Service or Farm Service Agency. Loans issued under these programs are already largely exempt from the NCUA’s appraisal requirements. Thus, the proposed threshold increase will not even be applicable to a portion of credit union mortgage assets.
Moreover, credit union lenders may continue to require appraisals on properties valued below the proposed new $400,000 threshold at their own discretion – our goal was simply to give institutions the flexibility to choose what works best for their members.
Of course, credit unions will still be expected, as always, to wisely manage risk in their loan portfolios and to ensure they continue to follow appropriate lending practices. In fact, credit unions are already well known for their prudent approach to underwriting residential real estate loans; we expect that to remain true if the new appraisal threshold takes effect.
Home ownership is essential to building strong communities, and a strong housing market is a vital driver of economic growth within the broader economy. At the same time, we recognize that the process of securing a loan and purchasing a home can be time-consuming and stressful, particularly for middle- and working-class borrowers and those who live in underserved areas.
So any reasonable steps we can take to reduce the time needed to complete real estate transactions, to simplify the process and to lower costs are well worth considering. This common sense adjustment to the appraisal threshold for residential real estate transactions is a timely regulatory reform that will serve lenders and borrowers well.