From a small northwestern observatory…

Federal regulators have proposed new rules for “risky” mortgages, including tightened appraisal standards.  The proposed new rules are open for comment until October 15.

The Federal Reserve, the Consumer Financial Protection Bureau and other Federal regulators have proposed that all risky mortgages have appraisals performed by licensed or certified real estate appraisers.  Intriguingly, similar regulations were put in place two decades ago for all Federally insured mortgages by the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”).  This act essentially created the appraisal license laws that exist in the 50-states today, but over the years, the appraisal requirements have been diluted to the point where many loans are made without an appraisal.  These proposed regulations recognize the problems caused in the banking system by un-supported mortgage loans.

In an effort to prevent the use of fraudulent appraisals in illegal “flipping”, the regulations would also require a second appraisal if the seller had purchased the home at a lower price during the prior six months.

A mortgage would be deemed “higher risk” if the interest rate was significantly above the Average Prime Offer Rate, survey weekly survey from the Federal Financial Institutions Examination Council. As of last week, the AOPA stood at 3.64%for 30-year “conforming” loans, and under the proposed rules, a higher-risk loan would be one carrying a rate of 5.14% or higher.  For “jumbo loans” (generally those exceeding $417,000), the threshold would be 6.14%.