New appraisal proposal designed to limit risk for allby Peter Miller
New rules designed to make mortgage loans less risky have been proposed by six federal financial regulators. This time around the target is how we value real estate when making risky loans.
Under the new proposal, lenders who want to make what are called “higher-risk mortgage loans” will be unable to value properties on the basis of broker price opinions (BPOs), automated valuations or drive-by appraisals. Generally, “higher-risk” loans have mortgage rates 1.5 percent above the average prime offer rate.
What’s the purpose of the proposed regulation?
The purpose of this proposal is to reduce mortgage risk for lenders, borrowers and mortgage investors by making sure that the property has enough value to support the loan in case of foreclosure.
Here are the main requirements:
- The lender must get a written appraisal
- The appraiser must be certified or licensed (BPOs cannot be used)
- The appraiser has to physically visit the property (no automated appraisals)
- The appraiser has to go inside the property (drive-by appraisals are out)
- The borrower has a right to see the appraisal without cost at least three days before closing (refinancing borrowers will have time to back out of the loan)
- If the property is being resold within 180 days and financed with a high-risk mortgage, lenders will need two appraisals, one each from two different appraisers.
The purpose of this last provision is to limit illegal flipping. However, this requirement inherently hits some legitimate investors and rehabbers who want to buy and turn over properties quickly.
The rules only apply to principal residences. The rules do not apply to reverse mortgages or properties financed with qualified residential mortgages.
The new rules will discourage lenders from making higher-cost mortgages, meaning some properties will not be sold to borrowers with weak credit. Some lenders will object, but the new standards will impact very few loans. More importantly, the proposed rules are a good idea given that the goal of the Dodd-Frank Wall Street reform is to make the mortgage-borrowing process less risky for everyone involved.