What do farmers and appraisers have in common?

Soon, a part time job! 

Recently, the appraisal threshold for residential properties – those with 1 -4 units – was proposed to be increased from $250,000 to $400,000. That proposal will likely find solid ground. According to an article published in Valuation: Insights and Perspectives for Real Estate Appraisers, this change would increase the share of regulated transactions exempted from the agencies appraisal requirement from 56% to 72%. With the median home price in the state of Wisconsin never reaching half of the new proposed $400,000 threshold now or for any month in the last 10 years, it looks like the figure could be much higher.

In April of 2018, the appraisal threshold for commercial properties was increased from $250,000 to $500,000. The commercial appraisers focusing on providing services within the lending industry are already feeling the effects, especially in the smaller, rural markets.

This means that any new money extended, from a federally regulated lending institution (bank or credit union) that is less than $400,000 for a residential property or less than $500,000 for a commercial property, will not require an appraisal by a licensed and/or certified appraiser.  Instead, an evaluation will be required. Per the Board of Governors of the Federal Reserve System, “Evaluations provide an estimate of the market value of real estate but could be less burdensome than appraisals because the agencies’ appraisal regulations do not require evaluations to be prepared by state licensed or certified appraisers.”

The intended goals of this change are to increase lending efficiency while reducing costs associated with property acquisition.  In the short term, this may work but not without unintended cost and consequences.  The last real estate recession occurred for a whole host of reasons like “ninja” loans, subprime mortgages, adjustable rate loans and parties to the transaction that didn’t have the borrower’s best interest in mind. We can all see clearly now, but while it was happening, most just assumed someone smarter knew what was going on.

Real estate agents, lenders, title companies, etc. are set to benefit if a transaction is closed. If a transaction fails to close, the real estate agent doesn’t collect a commission, the lender does not make the loan and the title company doesn’t get to collect the fees associated with title insurance. However, for a majority of the time, the appraisers gets paid regardless of the outcome.

Appraisers that didn’t hit the “magic number” in the past were passed over for another appraiser who could.  To stay employed, some appraisers had to adjust their moral compasses and find a way to hit that “magic number” or they were left to find a new career.  When the last real estate recession began, many fingers and much blame were pointed to the appraiser that killed the deal.  Maybe this time around, the cause of the problem will be for the lack of an appraiser? Will the blame will be put on the appraisers for not providing their services?

Many appraisal organizations are sounding the alarm and calling for action from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

When an evaluation can be completed by anyone (including the real estate agents, an employee of the lending institution providing the loan or a newbie at the title company) are we not just setting ourselves up for another market failure?