A bill introduced in the House Financial Services Committee would eliminate appraisal requirements established by the Dodd-Frank Act for certain higher-risk mortgages when lenders hold the loans in portfolio for at least three years.
The “Access to Affordable Mortgages Act,” H.R. 5148, would eliminate the requirement for full appraisals on higher-risk mortgages up to $250,000 and open the door for appraisers to instead perform “light appraisals” to determine the value of a property.
Currently, lenders must order a full appraisal (a standard appraisal along with an interior inspection) on a property when the annual percentage rate on the mortgage is 1.5 points higher than average prime offer rate. A second appraisal must be ordered if it appears the property is being flipped.
Rep. Blaine Luetkemeyer, R-Mo., introduced the bill and the committee voted 31-23 to approve it in July. Supporters of the legislation, including Reps. Randy Neugebauer, R-Texas, and Shelley Moore Capito, R-W.Va., contend that rolling back these requirements from the Dodd-Frank Act is necessary to help community banks and credit unions, particularly in rural areas where local appraisers are scarce.
The Credit Union National Association and Independent Community Bankers of America are both in support of the legislation.
The bill would provide both regulatory relief to lenders and increase access to mortgages by borrowers purchasing lower cost dwellings, NCUA President and CEO Bill Hampel wrote in a letter to Luetkemeyer.
In the wake of the housing crisis, a series of reforms were enacted to tighten appraisal requirements, particularly for property valuations used for riskier loans. Independent appraisals typically cost around $450, depending on the location of the property, a “significant expense” for borrowers of low dollar mortgages, ICBA President and CEO Camden Fine wrote in his own letter to Luetkemeyer. He added the legislation’s requirement that lenders hold these loans in portfolio for at least three years will curtail risky underwriting practices.
“When a lender holds a loan in portfolio, it bears the full risk of default and has every incentive to ensure that the loan is appropriately collateralized,” Fine wrote.
The Dodd-Frank requirements for full appraisals came out of a desire to keep lenders from relying on drive-by appraisals and automated valuation models to originate these types of loans, said Appraisal Institute President Ken Wilson, whose group is in favor of the legislation.
“Our estimation is that it would impact very few loans,” Wilson said in an interview, because community banks don’t make many subprime loans and most banks sell their loans on the secondary market.
“H.R. 5148 creates flexibility for lenders to turn to appraisers to provide cost-competitive valuation services where the development and reporting requirements suit the needs of the assignment,” Wilson wrote in a July 28 letter to Luetkemeyer.
Despite its passage in committee, the bill is unlikely to be approved by Congress this year. However, should Congress act on major legislation next year to reduce regulatory burdens on small lenders, the bill may have an opportunity for further consideration.