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The Federal Reserve, the Federal Deposit Insurance Company and the Office of the Comptroller of the Currency released an interim rule for the industry this week stating that banks will be able to put off getting an appraisal for 120 days following the close of certain residential and commercial real estate financial transactions for expeditious access to credit.
“Under the interim final rule, regulated institutions may close a real estate loan without a contemporaneous appraisal or evaluation, subject to a requirement that institutions obtain the appraisal or evaluation, as would have been required under the appraisal regulations without the deferral, within a grace period of 120 days after closing of the transaction,” the text of the rule reads.
The rule, which only applies to loans held on bank books, is short-term and will expire at the end of the year. It does not apply to real estate development or construction.
It will not be finalized until it is entered into the public register and is currently up for a comment period.
An appraisal is when an unbiased third party evaluates the value of a home or property. It is generally required during the mortgage loan process to make sure the amount of money requested by the borrower is reasonable.
Regulators are enacting the change in order to prevent any delays in lending to individuals and businesses as coronavirus creates a need among many to access additional liquidity with immediacy. Due to social distancing guidelines, the industry has run into challenges conducting appraisals.
Garrett Derderian, managing director of market analysis at CORE, called the move “extraordinary” and noted that it is a positive for consumers – but also brings about some concerns since appraisers play an important role in the housing market.
“Especially in uncertain times, this seems to send the message knowing the exact value of a property is unimportant, which is troubling,” Derderian told FOX Business. “While the agencies are advised to develop appropriate risk mitigation strategies, there is the possibility the appraisal ultimately reveals a lower market value than what was expected.”
Derderian also noted that the value of a property could change by the end of the 120-day grace period.
The rule could potentially open up opportunities for predatory lending or for government-sponsored entities to adopt similar measures.