Your Mortgage : Proposed Appraisal Cost Slash Has Flaw

The Clinton Administration’s top banking industry regulators want to slash the cost of thousands of home appraisals performed around the country, potentially saving you money on your next purchase or refinancing.

Sound good to you as a consumer? After all, why pay $300, $400 or more for an appraisal if federal banking regulators can help you pay less?

There’s just one catch: The regulators’ cost-cutting plans don’t necessarily extend to you. They’re solely for banks and thrift institutions, who need not pass on a cent of the actual net savings when you go to settlement on your mortgage.

Even more important, by allowing banks to use in-house or other personnel who are not state-licensed or certified as appraisers, the market valuation of the house you plan to finance could be affected--up or down.

For example, an uncertified, inexperienced appraisal employee of a bank could undervalue the property you expect to purchase, thereby lowering the maximum loan amount the house could support, and perhaps blowing the whole deal.

That could be the case particularly in market areas that take special skills to appraise, like neighborhoods that haven’t had much sales activity recently, or markets where values have been soft but are now turning around. The same goes for central city neighborhoods or rural areas.

So what’s going on here? What are the regulators planning to do? Here’s a quick overview:

Changes to federal appraisal standards for state banks, national banks and consumer savings banks are part of a deregulation package being pushed by the Clinton Administration. The four major financial institution overseers--the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision--now all agree:

Appraisals on properties with loans under $250,000 do not require professional valuations by licensed or certified appraisers.

That’s because licensed appraisers tend to charge more, and they take more time doing their valuations than banks and thrifts making home mortgages really need. Moreover, regulators say that studies by their own auditors show that loans on properties under $250,000 haven’t been the main source of the banking and thrift industries’ well-publicized financial woes. Loans to developers of condo projects or commercial properties have been far bigger culprits.

The regulators also argue that raising the threshold for certified appraisals from $100,000--its current statutory level nationwide--to $250,000 would have no impact whatsoever on the “safety and soundness” of any bank.

To the contrary, they say, appraisal deregulation would streamline the whole mortgage lending process and cut total costs. A $250,000 threshold would mean that 82% of all existing homes and 85% of newly built homes financed by banks and thrifts no longer would require valuations by licensed appraisers.

All loans originated for sale to the big secondary market agencies--Fannie Mae and Freddie Mac--would still be subject to the $100,000 rule, however, because both firms insist upon it to maintain underwriting quality. But large numbers of new loans would not.

How would that affect you if you applied for a mortgage at a bank or thrift covered by the revised standard, which could take effect in 1994? Would you get the same quality appraisal on your home and pay less?

One of the proposal’s advocates, Roger H. Pugh, the Federal Reserve’s assistant director for bank supervision and regulation, is emphatic that you will. By using in-house personnel to “evaluate” your property, “you’re going to save time and do the job at a lower cost.”

But Pugh conceded in an interview that nothing in the proposed regulatory change would encourage or require a bank to pass along the reduced cost to borrowers. The effective cost of an in-house valuation of a property could be relatively small--$150 or less--but the settlement sheet could still bill you for the going local rate, such as $350 or $400.

“I would hope that (banks) would share the benefits (of the relaxed appraisal standards) with the consumer,” he said. “But there is no requirement that they do so.”

That, in turn, say critics of the rule change, could open home mortgage borrowers to an unseen double-whammy: They would be charged the same amount as they’d pay for a licensed appraisal, but in reality receive a valuation by an individual who had not passed the minimum educational and experience tests for certification required of appraisers in all 50 states.

According to Richard C. Sorenson, the incoming president of the Appraisal Institute, a national professional group, more than 80,000 appraisers across the country have qualified for certification or licensing under state standards. And, argues Sorenson, the number of certified appraisers has been growing steadily, putting downward pressure on prices in some markets.

Competition among trained professionals--not cutting the quality of the product--is the smarter way to go on appraisals, in Sorenson’s view.

Distributed by the Washington Post Writers Group.