As a result of COVID-19 and the subsequent stay-at-home orders issued in many states requiring certain social distancing measures, a collection of federal agencies has issued guidance that provides flexibility for property evaluations and appraisals for certain real estate transactions.
These relaxed standards were issued given the difficulty for lenders, in the midst of this global pandemic, to conduct physical inspections of property and generate appraisals typically required by existing federal standards.
Under normal circumstances, evaluations and appraisals must be conducted in accordance with the Uniform Standards Professional Appraisal Practice, which generally provides for both an interior and exterior inspection of a property. Additionally, appraisals underwritten to Fannie Mae and Freddie Mac standards rely on both interior and exterior inspection to determine the appropriate value of an appraisal for a loan.
Relaxed Standards under Agencies’ Guidance
The guidance expands the ability of lenders with loans purchased by Fannie Mae and Freddie Mac to appraise a property based on exterior-only and desktop appraisals. This means appraisers can determine the relevant characteristics of a property through an exterior inspection, as well as photographs, property sketches and other recorded media that exist for the property, skipping the interior inspection.
All lenders may also may defer evaluations and appraisals for 120 days following the date of closing of a transaction. However, lenders should still ensure they are conducting a thorough review and appropriately adhering to their internal underwriting standards in assessing a borrower’s ability to repay a loan.
Lenders are also are expected to develop a risk mitigation strategy in the event a deferred appraisal or evaluation results in a large disparity in the actual and expected market value of a property, which is an important risk lenders must consider.
While these temporary deferrals of evaluations and appraisals apply to both residential and commercial real estate-related financial transactions, they do not apply to transactions involving the acquisition, development and construction of real estate, as these transactions and loans involve risks above and beyond those related to financing existing real estate.
Lenders and businesses should keep in mind these relaxed requirements for evaluations and appraisals expire on Dec. 31.
Existing Exceptions Provided for Lenders
In addition to the relaxation of evaluation and appraisal requirements, there are a number of existing exceptions — not issued as a result of COVID-19 — that lenders may rely on to avoid the requirements of an appraisal by a certified or licensed appraiser.
Lenders will want to consider whether a real- estate -related financial transaction falls into one of these categories:
- A residential real estate transaction with a transaction value of $400,000 or less
- A commercial real estate transaction with a transaction value of $500,000 or less
- A business loan with a transaction value of $1 million or less where the loan does not depend on the sale of, or rental income derived from, real estate as the primary source of repayment
- The transaction involves an existing extension of credit at the lending institution with two provisions. First, there has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the lender’s real estate collateral protection after the transaction. Second, there is no advancement of new monies, other than funds necessary to cover reasonable closing costs
- The transaction is wholly or partially insured or guaranteed by a U.S. government agency or U.S. government-sponsored agency
- The transaction either qualifies for sale to a U.S. government agency or government-sponsored agency or involves a residential real estate transaction where the appraisal conforms to the Fannie Mae or Freddie Mac appraisal standards
The measures associated with mitigating COVID-19 have substantially affected the area of real estate, but guidance from the agencies seeks to mitigate the effect of these measures on financial institutions engaged in real- estate -related financial transactions and their customers. During this time, lenders and businesses should take advantage of both the existing exceptions and newly issued standards that apply to evaluations and appraisals for real- estate loans.
About the author: Rachel Foster and Alexandra Chitwood are attorneys with the law firm of Warner Norcross + Judd LLP who concentrate their practices on real estate. They can be reached at email@example.com and firstname.lastname@example.org.