On April 14, 2020, several federal agencies released a joint statement to address challenges of appraisals and evaluations for real estate-related financial transactions affected by COVID-19.
The interagency statement was released by the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Consumer Financial Protection Bureau (CFPB), in consultation with the state financial regulators.
An overview of the statement’s guidelines follows.
Flexibility for Physical Property Inspections
The interagency statement references the Appraisal Standards Board’s 2020-21 Uniform Standards of Professional Appraisal Practice (USPAP) Q&A—issued March 17, 2020—indicates that, although an interior inspection of the property would customarily be part of the scope of the work, the current national emergency allows an appraiser to make extraordinary assumptions on the interior condition of the property.
This can only be done as long as the appraiser has a reasonable basis and their assumptions still results in a credible analysis.
An appraiser can determine the characteristics of the interior condition of a property through, among other things, any combination of:
- Property inspection
- Asset records
- Property sketches
- Recorded media
It should be noted that exterior and interior inspections are commonly conducted in preparing appraisals and evaluations, but aren’t required under USPAP.
Appraisal Flexibility for FNMA and FHLMC Loans
During the pandemic, properties underwritten to the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) standards are allowed exterior-only and desktop appraisals for certain qualified loans.
Appraisal or Evaluation Deferrals
Appraisal and evaluation completions required under the banking agencies’ appraisal regulations can now be deferred by a regulated institution for up to 120 days from the date of closing. This amended rule will be in effect only until December 31, 2020.
It should be noted the deferrals apply to both residential and commercial real estate-related financial transactions, however excludes transactions for acquisition, development, and construction of real estate.
Under the interim final rule, regulated institutions can close a real estate loan without a contemporaneous appraisal or evaluation within a grace period of 120 days after closing of the transaction. This, however, is subject to a requirement that institutions obtain the appraisal or evaluation as would’ve been required under prior appraisal regulations without the deferral.
The interagency statement provides a reminder of nine exceptions to appraisal requirements for institutions regulated by the National Credit Union Administration (NCUA) that may be useful during the current COVID-19 situation.
Collateral Value Estimates
While appraisals and evaluations can be 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.
The agencies also expect institutions to develop an appropriate risk mitigation strategy if the appraisal or evaluation ultimately reveals a market value significantly lower than the expected market value.
An institution’s risk mitigation strategy should consider safety and soundness risk to the institution, balanced with mitigation of financial harm to COVID-19-affected borrowers.
We’re Here to Help
To learn more about how the agencies’ guidance could impact you or your organization, contact your Moss Adams professional.
Note on COVID-19
During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: