When (Regulatory) Disasters Happen

Last week was Spring Break for my kids, so we decamped to the Outer Banks for some much-needed R&R. As always happens when I take vacation, the federal financial institutions regulators released a thinly-worded Notice in the Federal Register announcing a three-year exception to appraisal requirements imposed by Title XI of FIRREA for properties impacted by the California wildfires.

First, I laughed. Not because I find the Notice’s absence of meaningful substantiation funny (I don’t, but we’ll discuss that later), but because such a small percentage of mortgage lending falls into FIRREA’s bucket of “federally-related transactions” that the temporary exception will have a very limited impact on appraisal requirements for mortgage lending in these areas. That we sit in 2025, and federal regulators still do not fully comprehend the effects of their own 1994 rulemaking that exempted most mortgage lending from Title XI’s requirements is baffling to me.

If anything, this temporary exception will only further confuse homeowners and homebuyers who are navigating the effects of the wildfires. The average person does not understand how the nature of their lender affects what’s required as part of originating a mortgage loan but know that an appraisal is typically involved in the process. Removing the safeguards afforded by appraisals amid recovery from these wildfires is short-sighted.

And it’s not like California has an absence of appraisers available to perform appraisals on impacted properties. Per analysis by Chase Pursley, as covered by Appraisal Buzz, there are nearly 7,500 appraisers in the state today. While not impressive compared to other states on an appraisers/100K residents basis, that’s still a large absolute of appraisers – to say nothing of appraisers who could enter the state on reciprocal licenses or temporary practice permits to help with these properties.

What moved me from amusement to anger, though, was just how lacking this Notice was. I think it’s instructive to understand first what’s required by law to exercise this authority, so I’m going to block quote the whole of 12 USC 3352, which affords the agencies this authority:

(a) In general. Each Federal financial institutions regulatory agency may, by regulation or order, make exceptions to this title, and to standards prescribed pursuant to this title, for transactions involving institutions for which the agency is the primary Federal regulator with respect to real property located within a disaster area if the agency—

(1) makes the exception not later than 30 months after the date on which the President determines, pursuant to

section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act [42 USCS § 5170], that a major

disaster exists in the area; and

(2) determines that the exception—

(A) would facilitate recovery from the major disaster; and

(B) is consistent with safety and soundness.

(b) 3-year limit on exceptions. Any exception made under this section shall expire not later than 3 years after the date of the determination referred to in subsection (a)(1).

(c) Publication required. Any Federal financial institutions regulatory agency shall publish in the Federal Register a statement that—

(1) describes any exception made under this section; and

(2) explains how the exception—

(A) would facilitate recovery from the major disaster; and

(B) is consistent with safety and soundness.

(d) “Disaster area” defined. For purposes of this section, the term “disaster area” means an area in which the President, pursuant to section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act [42 USCS § 5170], has determined that a major disaster exists.

On paper, this is both a reasonable and necessary tool to have available when disasters happen, and appraisals simply aren’t readily available. Based on the exercise of this authority, you’d think a cataclysmic event wiped out vast swaths of the appraiser population in California, making the ability of those in the disaster areas to obtain appraisals difficult if not impossible.

That didn’t happen.

So, what is happening that, as a collective, the federal financial institutions regulators acted together to grant this exception until 2028? That question is unanswered.

We can all read the language in federal law and see it requires the agencies to explain two things: How the exception will facilitate recovery, and how the exception aligns with standard safety and soundness principles. Surely, this would require the agencies to provide a degree of analysis regarding the impacts in the disaster area and provide support for the exception based on these impacts.

“The agencies have determined that the disruption of real estate markets in the area designated as adversely affected by the major disaster interferes with the ability of depository institutions to obtain appraisals that comply with Title XI statutory and regulatory requirements. Further, the agencies have determined that the disruption may impede institutions in making loans and engaging in other transactions that would aid in the reconstruction and rehabilitation of the affected area.” [emphasis added]

That it! That’s the entire justification. No analysis, no data, nothing. Just that markets have been disrupted and that the disruption may impede lending. It’s entirely speculative in nature, and yet based only on that conjecture did the agencies decide to except a small pocket of lending activity from Title XI appraisal requirements for three years.

Look, I’m really empathetic to the federal workforce these days – the institutions are being dismantled, and people are being laid off in large numbers. It’s stressful, and those left behind to continue what work remains are overtaxed. That said, it’s pretty awful just how little effort went into substantiating these exceptions.

But wait, you say. What about safety and soundness? Again, from the Notice:

“The agencies also have determined that the exceptions are consistent with safety and soundness, provided that the depository institution determines the following: (1) the transaction involves real property located in the area designated as adversely affected by the major disaster; (2) there is a binding commitment to fund the transaction that was entered into on or after January 8, 2025, but no later than January 8, 2028; and (3) the value of the real property supports the institution’s decision to enter into the transaction.” [emphasis added]

[slams head on desk]

You know how you could reliably determine if the value of the real property supports the lending decision?

With an appraisal!

I know this is getting ranty, but the logical dissonance that must exist to decide this is a good idea is incredible. All these agencies got together, fundamentally misunderstood the nature of the relief they can provide, and provided it with absolutely zero foundational basis expressed for extending the relief based only on speculation about market impacts.

I know I’m becoming the angry old man on the porch, but anyone who has a base understanding of how the appraisal regulatory system works and what activities are covered by Title XI of FIRREA can tell you how pointless this exercise truly is. But maybe that’s the bigger issue – that there’s so few of us who actually know how this thing is supposed to work in the first place, and who knows how many will be left on the agency side going forward.

Tell me the system is broken without telling me it’s broken – I think this Notice does the trick.