By Douglas A. Potts, MAI, AI-GRS
As you might have heard, the National Credit Union Administration’s Board of Directors on July 18 quadrupled – from $250,000 to $1 million – the appraisal threshold for nonresidential real estate loans. Of course, increasing the threshold would drastically reduce the number of nonresidential real estate loans requiring an appraisal.
The Appraisal Institute vigorously condemned NCUA’s action, calling their decision irresponsible, radical and dangerous.
“This is an outlandish scenario for anyone who cares about the safety and soundness of the nation’s commercial real estate lending system, and it could recreate conditions that led to the financial crisis of the late 2000s,” Appraisal Institute President Stephen S. Wagner, MAI, SRA, AI-GRS, said in AI’s news release, adding “the NCUA’s ill-conceived, damaging decision shows overwhelmingly the need for immediate, rigorous congressional oversight.”
NCUA’s decision – based entirely on providing regulatory relief – seems to completely ignore the fact that the United States suffered through a financial crisis less than a decade ago. If anything, current market conditions necessitate heightened due diligence by regulated institutions — not a loosening of a fundamental risk management activity.
So, where do we go from here? The federal banking regulatory agencies – the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Federal Reserve Board – last year approved increasing the commercial appraisal threshold from $250,000 to $500,000. The NCUA’s decision could create a regulatory arms race between the agencies and the NCUA. Therefore, those same regulatory agencies need to reject the NCUA’s effort, as any so-called regulatory relief has the potential to do untold economic damage.
Think about it. The NCUA – the agency with the least direct experience in overseeing business and commercial real estate lending – effectively could be driving the appraisal policies for the entire financial regulatory system. The bank regulatory agencies – despite already determining otherwise – will face pressure to establish a corresponding threshold level to the NCUA’s level. This could pose major problems.
Additionally, federal legislation signed into law last December links commercial appraisal threshold levels for two of the Small Business Administration’s most popular loan programs to those established by the federal banking regulatory agencies.
As President Wagner further noted, “the potential domino effect is chilling. Everyone involved in this country’s commercial real estate industry should be incensed at the NCUA’s reckless decision, which potentially places the nation’s economy at significant risk.”
Imagine a commercial real estate market with fewer appraisals and more risk. The NCUA’s action would more than double the number of credit union loans not requiring an appraisal – with the proportion exempted rising from 27% to 66%. Keep in mind that last year U.S. credit unions made $67 billion in commercial loans.
There’s no question that this situation warrants not only increased congressional oversight, but also improvements to the appraisal regulatory structure. That’s where the banking regulatory agencies become pivotal. They have the power to halt this dangerous action, and they should do so without delay. In the interim, the Appraisal Institute is working with members of Congress and their staffs to bring about meaningful change that will help prevent this type of outrageously heedless public policy making in the future.
Douglas A. Potts, MAI, AI-GRS, is chair of the Appraisal Institute’s Government Relations Committee.