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Appraisal Institute Urges Caution On Commercial Appraisal Threshold Increase

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Mike Kennedy

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Appraisal Institute Urges Caution on Appraisal Threshold
The Appraisal Institute on March 21 responded to the Federal Financial Institutions Examination Council's Joint Report to Congress by cautioning federal regulators against increasing from $250,000 to $400,000 the appraisal threshold for commercial real estate transactions. The report indicated the threshold for residential real estate transactions would remain unchanged. > FULL STORY
 

PL1957

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It seems to me that the lower priced properties are those with a greater risk of default.
Interesting question ... from what I've seen, lower priced properties tend to have a lot more personal involvement, in that a significant portion of the owners net worth is tied to the real estate. They tend not to default unless there's no other alternative. Higher priced properties tend to owned by partnerships or other entities who don't hesitate to toss the keys back at a lender if it's to their benefit. I'd love to see some real numbers as to percent of defaults vs. property value.
 

Eli

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Do they say why they want to increase the threshold?
 

hastalavista

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Reading the inter-agency guidelines, the competency level and separation of the elevator from the lending-side of the institution isn't always that easy to achieve.
I've had bank clients who have competent persons on their staff (non-appraisers) who do their evaluation work but sometimes they lack local market knowledge; the prudent institution, in such cases, would hire an appraiser for such work. Depending on the institution's geographical lending-footprint, staffers may know the immediate area well, but may not know the outlying areas well. And, obviously, property-type comes into play. Doing a plain vanilla property is different form doing an odd-ball, regardless of the value.

The guidelines do differentiate between smaller institutions and larger ones in that they allow more flexibility in the co-mingling of the evaluator's duties (there can be some overlap with the lending department); however, the development and competency standards are the same.

What will likely happen in some markets and for certain properties, there will be a shift of the kind of appraisal ordered under certain circumstances. For loan monitoring, I would expect the shift to move from a traditional appraisal to a limited scope appraisal reported under a restricted appraisal format. BTW, the IAG notes that financial institutions should not accept evaluations from another institution as they can an appraisal. So I'm not sure how much origination work would be shifted to evaluations except under a very low-risk profile.

The low-risk profile is very important. While the IAG refers to the de minimis as a required threshold for most loans secured by real property, loans that are below the de minimis but have a higher risk would be expected to have an appraisal completed.

In sum, I'm thinking that a change in the di minimis will affect some appraisal work, but I also see some shifting from the traditional appraisal to a restricted appraisal/limited SOW to meet the evaluation standards.
 

gregb

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Did I mis-read the proposed threshold change, it seems it only applies to commercial real estate?-

Appraisal Institute Urges Caution on Appraisal Thresholds
March 21, 2017 02:12 PM
CHICAGO (March 21, 2017) – The nation’s largest professional association of real estate appraisers today cautioned federal regulators over increasing the transaction values requiring an appraisal, also known as the appraisal threshold.

The Appraisal Institute was responding to the Federal Financial Institutions Examination Council’s Joint Report to Congress issued today, which said the federal banking agencies are developing a proposal to increase from $250,000 to $400,000 the threshold for commercial real estate transactions. The report did not propose changes to the current residential real estate threshold of $250,000. The agencies continue to review the $1 million business loan threshold for owner-occupied real estate.

The nation’s banking regulatory agencies – the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Federal Reserve – are required every 10 years by the federal Economic Growth and Regulatory Paperwork Reduction Act of 1996 to review federal banking regulations.

“The Appraisal Institute urges federal regulators to exercise great care with regard totheir proposed commercial threshold increase and potential business loan increase, particularly when the Federal Reserve has cited concerns over the commercial real estate market, and when concerns recently have been raised about the use of evaluations over appraisals by regulated institutions,” said Appraisal Institute President Jim Amorin, MAI, SRA, AI-GRS. “We also applaud the agencies’ prudent decision to maintain the current residential threshold.”

Amorin noted that, as part of its mission to serve the public interest, the Appraisal Institute believes that appraisals serve a vital role in risk mitigation, and that lenders and borrowers benefit from the role appraisals play.

He also noted that the Appraisal Institute has provided its recommendations to the regulatory agencies, including:

· Cautioning against an increase of the appraisal threshold levels to the federal bank regulatory agencies during the official EGRPRA comment period in 2014.

· Educating Congressional oversight committees on the importance of the current appraisal threshold levels during regulatory oversight hearings in 2015.

· Attending all of the Economic Growth and Regulatory Paperwork Reduction Act outreach meetings held in 2015, encouraging bank regulatory agencies to maintain the current threshold levels and putting more resources toward educating examined banks about existing exemptions to appraisal requirements.

· Helping coordinate a joint industry letter in 2015 signed by nine real estate organizations in support of maintaining the current appraisal threshold levels.
 

hastalavista

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I think you are right, Greg- this is a commercial de minimis.
 

Eli

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Tennessee
Scary. The fact that the income cap approach is so dependent in many commercial appraisals makes it scary when it comes to certain intended users and uses.
 

Meandering

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Pennsylvania
The thing to consider is that,

in outlying depressed areas, where home prices are very low,

so too are commercial values very low,

So what happens when none of the real estate in certain small towns and areas have values above threshold levels?

No appraisers are needed for lending. Will private work support an appraiser staying there?

Will values ever "recover" to threshold levels where an appraiser will be required, yet no one has appraised anything in that area for some years?

This will effectively become redlining and a further stratification between the poor and the not-so-poor.



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