If you’ve heard rumblings about a new postponed appraisal rule announced by the Federal Reserve in April 2020, you might be wondering what the implications are for you — either as a homeowner or someone thinking about selling their home in the near future. We talked with some veteran real estate agents and appraisal experts, and here’s the gist of what we found.
The postponed appraisal rule was created to accommodate the surge of refinancings driven by low mortgage interest rates. In the wake of COVID-19 and the overall rise in demand for appraisals, home appraisals have taken longer to complete and held up financing as a major bottleneck. Delaying the appraisal, in theory, helps to streamline some of those refis; however, there’s a catch. The rule doesn’t apply to government-backed loans, so it doesn’t work for most mortgages.
As a result, the impact of the new rule isn’t as widespread as you might think. In addition, if you’re selling a home to a buyer who is financing the purchase, you’ll still need to go through the appraisal process. Read on to learn more about the ins and outs of the postponed appraisal rule, as well as how it will (and will not) affect your situation.
Why is an appraisal necessary?
Unless you’re working with an iBuyer, investor, or someone with cash on hand, the buyer of your home will likely need a mortgage to finance the sale. In that case, the lender will require an appraisal to ensure that they’re not loaning out more than the property’s fair market value. This helps protect the lender from significant loss on the property if the buyer defaults on the loan, and it also enables them to sell off the loan on the secondary mortgage market.
If the appraisal comes in lower than the contract price, the deal could be in jeopardy. To save the sale, the buyer could pony up the extra cash, the seller might lower the home’s price, or the two could work together to close the gap.
How COVID-19 changed the home appraisal process
In a “normal” housing market, the appraiser typically visits the home in-person and does a physical walkthrough, looking at all of its major systems and assessing its condition.
But starting in mid-March, when the coronavirus pandemic led to stay-at-home and shelter-in-place orders, some real estate transactions used alternative appraisal methods.
These included desktop appraisals, where the appraiser bases the valuation solely on data, and hybrid appraisals, which included resources like property photos, information from previous property inspections, drive-by assessments, or video tours. These alternative appraisal rules applied to appraisals conducted through May 17.
Kevin Kendrick, a top real estate agent in Orlando, Florida, has seen lenders using only comps and other records to assess the value and waiving the actual in-person appraisal.
“In certain circumstances, a financial institution can use an existing evaluation or appraisal instead of obtaining a new appraisal, as long as the institution can confirm that the evaluation or appraisal remains valid,” notes Kenon Chen, EVP of corporate strategy for Clear Capital.
What is the postponed appraisal rule?
On April 14 of this year, the Federal Reserve announced that in certain circumstances, appraisals and evaluations of residential or commercial properties can be deferred for up to 120 days after closing. This four-month postponement is in effect until December 31, 2020, unless the Fed opts to extend it.
Why the new rule? According to the Fed, it was created in order to “extend financing to creditworthy households and businesses quickly in the wake of the national emergency declared in connection with COVID-19.”
It’s important to note that the postponement rule only applies to mortgage loans made by banks that they intend to keep in their own portfolios. Most lenders sell home loans on the secondary mortgage market to one of the government-sponsored entities, which means the majority of loans won’t be impacted by the rule.
“By requiring the banks to keep the loans in-house, the regulators have ensured that the banks will proceed with caution,” notes Mason Spurgeon with Spurgeon Appraisals. “This will minimize the risk of bad or fraudulent loans.”
What loans are exempt from the postponed appraisal rule?
The rule doesn’t apply to any loans that are sold to or guaranteed by a government agency or government-sponsored enterprise, such as FHA, HUD, VA, or Fannie Mae/Freddie Mac loans. “These loans will still need appraisals before closing because they have independent lending requirements,” explains Louisiana real estate investor Travis Steinemann. “They may update them to match this rule, but that is just speculation.”
The rule also excludes “…transactions for acquisition, development, and construction of real estate,” which means it only pertains to refinance loans, says Spurgeon. “The lending institutions will still be required to have certified appraisals before closing on purchases,” he notes.
How is value assessed with postponed appraisals?
Chen points out that even when appraisals and evaluations are deferred, “the agencies expect institutions to use best efforts and available information to develop a well-informed estimate of the collateral value of the subject property.” In other words, even in the absence of a traditional appraisal, the lender is still expected to do a thorough job of determining the home’s value.
According to the rule, lending institutions are to “develop procedures for estimating the collateral’s value for the purposes of extending or refinancing credit.” Based on this guideline, it seems the lenders will be able to create their own valuation policies.
“Many banks already have policies in place to complete in-house collateral evaluations on real estate properties that have lower loan amounts, so they will likely just extend this same process to the larger loans,” Spurgeon predicts.
How might the postponed appraisal rule impact sellers?
As the postponed appraisal rule delays valuations for refinances, the process of selling a home could go quicker than usual, says Spurgeon. “With restrictions lifted on refinance appraisals, appraisers will be able to give priority to purchase appraisals, which still have to be completed before closing,” he notes.
Steinemann points out that the postponed appraisals can also be beneficial for those who are refinancing, because it can enable them to liquidate equity much quicker. “If a homeowner needs the money to stay afloat until this is over, this is one way to do it,” he says.
As consumers face unemployment fallout from the coronavirus and asset losses, tapping into home equity can provide much-needed economic relief.
“Depending on your current mortgage rate and how much the closing costs associated with the new loan are, even a small reduction in your rate could yield significant savings over the life of the loan,” notes BBVA USA Head of Consumer Direct Mortgage Lending Bob Jones in a blog post. “On the other hand, competitive rates alone may not be enough to justify refinancing if you don’t plan to stay in your home long-term.”
What happens if the appraisal comes in low after closing?
“The biggest concern with this rule is the property value falling in those 120 days — which is likely in an unstable economy like the one we face right now,” says Steinemann.
So, what happens if the loan amount for a refinanced property is higher than the appraised value after closing? Does the lender cancel the loan, change the terms, or require more money down from the homeowner for the refinanced loan?
The rule isn’t clear about that outcome, Spurgeon notes: “It only states that the banks should do their best to mitigate the risk and must keep the loan on their books. So, it appears that the banks will have the most to lose if the real estate was not properly valued.”
In a nutshell, says Steinemann, the postponed appraisal rule is the government’s way of trying to prevent a real estate collapse and to keep the money flowing despite tighter lending standards. “It will be interesting to see how this works out over the next few months, and what does happen if property values fall between closing and appraisal,” he says.
If you’re selling a home to a buyer who is financing the purchase, you’ll still need to go through the appraisal process and the postponement rule won’t apply. But if you’re a homeowner who is considering refinancing during this uncertain time, you may find that the appraisal is shelved until after you’ve closed on the new loan.
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