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On October 18, FHFA announced two measures to advance housing sustainability and affordability. Speaking before the 2021 Mortgage Bankers Association Annual Convention and Expo, acting Director Sandra Thompson announced that Fannie Mae and Freddie Mac (GSEs) “will incorporate desktop appraisals into their guides for many new purchase loans starting in early 2022.” Thompson explained that including desktop appraisals in the selling guides will change what was a temporary flexibility into an option that will “mitigate risk for use over the long-term” and will “become an established option for originating [GSE] loans.” According to Thompson, this certainty should allow lenders, borrowers, and appraisers to take advantage of efficiency gains provided through desktop appraisals.
Thompson also announced that the GSEs will expand their refinance programs for low- and moderate-income borrowers that were introduced last year. Several enhancements will be made to the RefiNow and RefiPossible programs to expand eligibility requirements and make the programs easier for lenders to offer. Thompson noted that income threshold for eligible borrowers will be raised from 80 percent of area median income to 100 percent. Additionally, the GSEs are making other modifications to reduce operational frictions for lenders.
On July 2, the CFPB announced its prioritization of resources to focus on the role of racial bias in home appraisals. According to the CFPB, undervaluation of homes based on race further drives the racial wealth divide and overvaluation of homes also puts family wealth at risk, leading to higher rates of foreclosure. On June 15, the CFPB hosted a home appraisal bias event where the NCUA, OCC, and HUD discussed insights on the role of racial bias in home appraisals, which led to conversations on how to collaborate with stakeholders in eliminating racial bias and other inequities in housing. The Bureau also noted it is “pleased to participate” in President Biden’s new interagency initiative to address inequity in home appraisals. The announcement offers numerous tools, among other resources, such as a joint housing website for those needing help paying their mortgage or rent, particularly in light of the CDC’s moratorium expiring on July 31, and a link to HUD’s Fair Housing and Equal Opportunity office for victims of appraisal bias.
On June 15, OCC acting Comptroller Michael J. Hsu delivered remarks during the CFPB’s Virtual Home Appraisal Bias Event to raise awareness on the importance of reducing bias in real estate appraisals. The event included discussions with civil rights organizations, housing policy experts, and other federal agencies on how bias can occur in real estate appraisals and automated valuation models. Biased appraisals, Hsu noted, have a large impact on lending and contribute to inequity in housing values. He pointed to data from studies showing that homes in Black neighborhoods are valued at approximately half the price as homes in neighborhoods with few or no Black residents. This difference has created a $156 billion cumulative loss in value across the country for majority-Black neighborhoods, Hsu stated. He further emphasized that “[w]hile appraisers and the appraisal process are not often seen as parts of the banking system, there are clear intersections. Banking regulations require appraisals on certain transactions, and banks rely on third-party appraisals in their underwriting and overall risk management practices. Regulators, including the OCC, expect banks to ensure their vendors treat customers fairly and do not discriminate, and we are seeing banks held accountable for discrimination in appraisals they use.” Hsu added that holding banks accountable, while necessary, is not enough to solve the problem of biased appraisals, and that a solution will require collaboration between all stakeholders, including the attendees participating in the Bureau’s event.
On April 21, the FHFA announced a final extension of certain loan origination guidelines put in place to assist borrowers during the Covid-19 pandemic. Specifically, the FHFA extended until May 31 existing guidelines related to: (i) alternative appraisal requirements on purchase and rate term refinance loans; (ii) completion report flexibilities; and (iii) Freddie Mac’s CHOICERenovation Mortgage flexibilities. The extensions are implemented in updates to Fannie Mae Lender Letter LL-2021-04 and Freddie Mac Guide Bulletin 2021-15. FHFA stated, however, that other temporary flexibilities will expire as scheduled on April 30, including alternative methods for employment verification, condominium project reviews, and expanded power of attorney.
On March 10, a divided U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s summary judgment that an appraisal practice common before 2009 was unconscionable under the West Virginia Consumer Credit and Protection Act. According to the opinion, a class of borrowers filed a lawsuit against a lender and an appraisal management company, alleging the defendants relayed home value estimates provided by borrowers on their applications to appraisers and allegedly asked appraisers “to take another look” if the appraisal value came in lower than the estimated value. The plaintiffs claimed, among other things, that this practice constituted a breach of contract and unconscionable inducement under West Virginia law. Plaintiffs also filed a civil conspiracy claim against the defendants. The district court conditionally certified the class. It ultimately imposed a $9.6 million statutory penalty and awarded class members the appraisal fees paid as damages for breach of contract in an amount totaling nearly $1 million. However, no damages were awarded for conspiracy. The defendants appealed, arguing that summary judgment was wrongfully granted and that the class should not have been certified since individual issues predominated over common ones.
On appeal, the majority determined, among other things, that the acceptability of the challenged practice “shifted dramatically during the class period,” and that “[w]hat started out as a common (though questionable) practice became one that, in short order, was explicitly forbidden.” The majority determined the plaintiffs established their claim for unconscionable inducement, and that it “was unethical for Defendants to attempt to pressure or influence appraisers.” The majority also affirmed the district court’s ruling on the conspiracy claim. However, the appellate court concluded that the district court improperly granted summary judgment on the breach of contract claim and ordered the district court to reexamine whether breach of contract occurred and whether the plaintiffs suffered resulting damages.
The dissenting judge called the majority opinion “startling,” writing that “[t]his is an unjust punishment indeed for a company that followed a practice that was both customary and legal and only later modified to avoid potentially influencing appraisers.”
On March 11, the FHFA announced the extension of several loan origination guidelines put in place to assist borrowers during the Covid-19 pandemic. Specifically, FHFA extended until April 30 existing guidelines related to: (i) alternative appraisal requirements on purchase and rate term refinance loans; (ii) alternative methods for documenting income and verifying employment before loan closing; and (iii) the expanded use of power of attorney to assist with loan closings. The extensions are implemented in updates to Fannie Mae Lender Letters LL-2021-03 and LL-2021-04, and Freddie Mac Guide Bulletin 2021-10 and Selling FAQs.
On October 28, FHA issued Mortgagee Letter 2020-37, which re-extends the effective date of the employment reverification guidance in Mortgagee Letter 2020-05, previously covered here, here, here, and here. The Mortgagee Letter also updates the appraisal scope of work inspection option providing for exterior-only appraisals, which limits face-to-face contact for certain transactions affected by Covid-19. The updated appraisal guidance is effective on November 1, 2020 and is applicable to appraisals with an effective date on or before December 31, 2020. The extension of the employment reverification guidance is effective immediately for cases closed on or before December 31, 2020.
On October 1, 2020, the U.S. Department of Housing and Urban Development issued Mortgagee Letter 20-33, which extends interim procedures regarding site access issues related to Section 232 mortgage insurance applications during the Covid-19 pandemic (previously covered here and here). The guidance provides temporary modifications pertaining to third-party site inspections for Section 232 FHA-insured healthcare facilities effective through December 31, 2020. The letter also provides guidance on other aspects relating to Section 232 properties, including regarding lender underwriter site visits, appraisals, and inspections on new construction, among other things.
Recently, the OCC, Federal Reserve Board, and FDIC (collectively, “the agencies”) adopted four interim final rules issued as a result of the Covid-19 pandemic as two final rules. Highlights of the rules include:
- Regulatory Capital. The agencies issued a final rule covering revisions to the regulatory capital rule and the liquidity coverage ratio (LCR) rule made under three interim final rules. The final rule, which adopts three of the interim final rules as final with no changes, (i) allows financial institutions to participate in the Money Market Mutual Fund Liquidity Facility (MMLF) and Paycheck Protection Program Lending Facility (PPPLF) by neutralizing the regulatory capital effects of participating in each of the programs (covered by InfoBytes here and here); and (ii) modifies the agencies’ LCR rule to support participation in the MMLF and the PPPLF (covered by InfoBytes here).
- Appraisals and Evaluations. The agencies adopted as final, with one revision, an interim final rule (covered by InfoBytes here) allowing regulated financial institutions to defer completion of appraisals and evaluations for certain residential and commercial real estate transactions, excluding those involving the acquisition, development, and construction of real estate. Financial institutions are allowed up to 120 days from the closing date to obtain the required appraisal or evaluation in order to expedite the liquidity needs of borrowers. The final rule is effective through December 31.
On August 28, the FHA issued Mortgagee Letter 2020-28, which re-extends the effective date of Mortgagee Letter 2020-05, previously covered here, here, and here. The re-extension of appraisal guidance in Mortgagee letter 2020-05 is effective immediately for appraisals with an effective date on or before October 31, 2020. The extension of re-verification of employment guidance is effective immediately for cases closed on or before October 31, 2020.