New appraisal requirements are being proposed for higher-risk mortgages. Included in the proposal is a requirement for a second appraisal at the lender’s expense if the property recently sold for less than the purchase price.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires that new appraisal requirements be established for higher-risk loans on residential properties.
A mortgage is considered higher-risk if the interest rate exceeds a certain threshold and is secured by the borrower’s primary residence. The threshold for first liens that fall within Freddie Mac’s loan limit is 1.5 percentage points higher than the average prime offer rate, while loans in excess of Freddie’s limit have a threshold of 2.5 percent.
On subordinate liens, the threshold is 3.5 percent.
Reverse mortgages and loans that meet the definition of a qualified mortgage are excluded from the higher-risk mortgage classification.
A proposed rule was jointly issued Wednesday by the Consumer Financial Protection Agency, the Federal Housing Finance Agency and federal banking and credit union regulators. The proposal implements amendments to the Truth in Lending Act enacted by Dodd-Frank.
The rule requires that a licensed or certified appraiser inspects the interior of the property and prepares a written report for higher-risk loans.
A creditor on such a transaction would be required to disclose information about the purpose of the appraisal to the prospective borrower and provide free a copy of all appraisal reports at least three days prior to closing. Consumers must also be advised that they can order second appraisals at their own expense.
In cases where a seller acquired the property during the prior six months for less than the price being paid by the buyer, the creditor would be required to obtain an additional appraisal at no cost to the consumer. The second report would need to analyze the difference in sales prices and address changes in market conditions and property improvements since the previous sale.
Comments are being sought about what price increase threshold, if any, would be required in order to trigger the second report.
The second appraisal requirement is intended to address fraudulent flipping and ensure that any increase in the value is legitimate.
Comments are being accepted on the proposed rule until Oct. 15 at [email protected].
