Appraisal Institute Urges Caution On Commercial Appraisal Threshold Increase

[hastalavista]

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.

I'm thinking in such a market, the risk-profile of the loan would be higher.

I'm not discounting your observation, Marion; what I am thinking is that while raising the de minimis would certainly let some of the current work that falls into the traditional appraisal bucket flow into an evaluation bucket, the de minimis is a hard stop (if more than the de minimis, then STOP and go to an appraisal; if less, then evaluation is an option...). The next threshold is the risk profile of the loan. If risk, then go to an appraisal.

I'll defer to your and other commercial appraisers who work in more rural-like markets on the sophistication and risk-tolerance/analysis ability of the smaller banks that work in those markets.

 

[BRCJR]

It is not the property values it is the loan amount......

 

[Howard Klahr]

I'd love to see some real numbers as to percent of defaults vs. property value

Trepp has pretty good info for proxy and more detail available with subscription. Check with your Capital Markets guys for access

 

[PL1957]

Trepp has pretty good info for proxy and more detail available with subscription. Check with your Capital Markets guys for access

I'd be surprised if Trepp went down that low. I don't recall a lot of individual CMBS loans under $500K.

 

[Terrel L. Shields]

Outside very large retail, warehousing, etc. the kinds of commercial small bank properties that I've worked tend to be less than $100,000 in small towns.

 

[Mark K]

Outside very large retail, warehousing, etc. the kinds of commercial small bank properties that I've worked tend to be less than $100,000 in small towns.

None of the small banks in this area have any interest in a 'de minimis' exception; they require appraisals on virtually every commercial loan. Occasionally they'll opt not to have an appraisal but will require additional security, another property or the borrower's home, for additional collateral on the mtg.

 

[Howard Klahr]

loans under $500K.

Agreed, but you'll have default info for $1-$2mm and up.

 

[Meandering]

None of the small banks in this area have any interest in a 'de minimis' exception; they require appraisals on virtually every commercial loan. Occasionally they'll opt not to have an appraisal but will require additional security, another property or the borrower's home, for additional collateral on the mtg.

yup, but that "other" securing property will also qualify for an evaluation, not an appraisal.

And eventually you wind up with nothing that will be valued above what will qualify for an evaluation. Kinda like how any commercial property with a house on it, is suddenly a residential property when a residential appraiser has been hired to appraise it.

Seen that one too many times.

.

 

[Mike Kennedy]

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.

POST 1 "The report indicated the threshold for residential real estate transactions would remain unchanged"

 

[Eli]

None of the small banks in this area have any interest in a 'de minimis' exception; they require appraisals on virtually every commercial loan. Occasionally they'll opt not to have an appraisal but will require additional security, another property or the borrower's home, for additional collateral on the mtg.

There is many reasons for that. Word travels fast in a small town. They see some things better. Risk, bias, reputation, borrower trust, etc etc. It's like Mayberry.