Banks get 120-day deferrals on appraisals

Policy meant to encourage lending applies to commercial and resi loans; doesn't apply to RE development and construction

Miller Samuel's Jonathan Miller and Department of the Treasury and Steve Mnuchin (Credit: Wikipedia; Getty Images)
Miller Samuel's Jonathan Miller and Department of the Treasury and Steve Mnuchin (Credit: Wikipedia; Getty Images)

In an extraordinary move meant to keep real estate lending flowing, regulators are permitting banks to move ahead with closing loans without having an appraisal completed in advance.

Federal banking agencies released an interim ruling Tuesday that will allow financial institutions to temporarily close on certain commercial and residential loans without having an appraisal completed in advance. The rule will give banks up to 120 days after the loan is closed to conduct an appraisal or evaluation.

Notably, the rule can only apply to loans held on the bank’s books. It will expire on Dec. 31, 2020.

Regulators are not allowing deferred appraisals for loans involving the acquisition, development and construction of real estate, “because repayment of those transactions is generally dependent on the completion or sale of the property being held as collateral as opposed to repayment generated by existing collateral or the borrower.”

The agencies’ hope to “quickly provide liquidity to owners of commercial and residential property” in light of the coronavirus pandemic by allowing banks flexibility on when appraisals take place. It noted that government restrictions on non-essential travel and social distancing protocols have “led to complications” in conducting appraisals and evaluations that may be causing delays.

The rule will become effective as soon as it appears in the Federal Register, a spokesperson for the Federal Deposit Insurance Corporation said. He confirmed the rule was submitted for publication and said that the public, including banks, will have 45 days to comment on the rule.

Not all appraisers think the ruling is prudent. Jonathan Miller, founder of New York-based appraisal firm Miller Samuel, described it as an “unnecessary moral hazard.”

“It sends a message that we don’t really need to know the value of the property before we lend, which on the face seems preposterous,” he said. Miller, who also authors popular residential market reports for Douglas Elliman, was an outspoken critic of the appraisal industry leading up to the 2008 crash, accusing many of his peers of intentionally inflating home values.

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“The intention here is to try to just remove any friction from the process, except that’s not the problem. That’s not why loan volume has slowed,” Miller continued. “It’s not even getting to the appraiser at this point.”

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On the residential side, Miller pointed to record levels of unemployment and some lenders – such as JPMorgan Chase – raising their lending standards as key barriers for new-loan activity.

In terms of commercial lending, loan volume for the first quarter of 2020 is not yet available, but some deals have been delayed or cancelled as some lenders walk away.

Jamie Woodwell, head of commercial research at the Mortgage Bankers Association, said in a statement that any momentum from originations in 2019 was “halted by the spread of the coronavirus” due to a slowdown in demand from borrowers and the difficulty underwriting and funding the loans from lenders.

Government-sponsored entities including Fannie Mae and Freddie Mac have temporarily modified how appraisals are conducted in a bid to prevent property visits from becoming the definitive barrier to transactions moving forward. Both Fannie and Freddie issued guidance allowing exterior-only and desktop to replace interior appraisals for certain loans.

Miller said he expects that the federal agencies’ rule to be mirrored by other regulators and predicted it will open a door for bad actors, including predatory lenders and fraudsters.

“Because that always happens when the rules are removed,” he said. “This can’t end well.”

Write to Erin Hudson at