Interagency Guidelines, FDIC and AS IS Values

[George Hatch]

They were looking at everything in the portfolio, including appraisals of individual SFRs and 2-4s. Any appraisal that employed an HC of any type, including long term loans to the owner-users if those loans were being retained in house.

Edit to add: The reason I was reading the bank examiner reports was because I was writing the appraisal policy guidelines for a couple of these small commercial banks - which are federally regulated and which do routinely engage in RRTs and FRTs. My process involved reading every review over the previous 10 years to see what they had previously been written up for, so I could specifically address those issues in promulgating those appraisal policies.

I used to work on staff at a commercial bank that did a lot of construction - including construction of individual homes. I had occasion to appraise a number of partially complete homes for foreclosure purposes. It's not really that difficult to do and when projects like that are failing due to economic conditions there are usually other comparable sales that also sold as partially complete.

BTW, every construction lender I ever worked with retained a full set of the plans for their own use in the event the project went belly up during construction.


Some of you guys do assignments for credit unions. Only some of those credit unions resell their mortgages to the secondary market. OTOH, the GSEs don't answer to the federal banking regulators - they have their own regulator; so their situation is different than that at the regulated banks.

 

[mark hurlock]

First of all, my crack about how 90% of you guys back into site value in SFR appraisals is based on my experience - it's not an assumption. You know I was a CE instructor for 16 years, right? The 7-Hr Cost Approach course (developed by M&S) was one of the courses I was teaching on a regular basis, and I've had literally thousands of appraisers take that course from me at one point or another.

You sure as hell don't have that kind of exposure to what residential appraisers have been doing.

Moreover I was probably being diplomatic at pegging it as low as 90%.

Secondly, you were the one who made the foolish and ill-considered comment about the "as is" already being in the Cost Approach, not me. All I did was point out the obvious disconnect. So yes, it was *entirely* appropriate for me to correct you on your error. Even if you want to be stubborn about it I'm not about to allow that form-monkey mentality stand for others to believe without challenging it. I may not care how you do your appraisals but I'm not going to let you mislead other people if/when you're wrong.


Secondly, when I have personally heard senior regulatory officials and their review appraisers - acting in their official capacity - speak of the topic and have actually read reviews from the feds on a bank writing them up for not getting as is values on those reports you're welcome to disagree based on your interpretation of the semantics in the regs all you want. It doesn't change how the feds have been using those regs.

If my choices are to take them them at their word about their intent vs your interpretation of the regs that's not a particularly difficult choice to make. I assume everyone in this thread is capable of making their own choices.

I'm not telling anyone what to think. I'm just conveying what I know and expressing my opinions.

Now I'll concede the point that the auditors who go out to do the banks to do the reviews are among the least informed and least experienced employees at those regulatory agencies, and they don't always catch the violations when they see them, and they certainly aren't real conversant with appraisals; but their incompetence doesn't represent a change in the official position at those agencies.


As an avid player of word games I know you're capable of understanding the distinction between a clarification or elaboration vs a change in policy or intent. It happens all the time in the rules and regulations.

I must say I find you ridiculous. If I found issues while reviewing appraisals, would it be fair to include “you” in my criticism of others. Your use of “you” is an assumption, unjustified and inexcusable. You have no clue how I complete a cost approach.

I made no foolish or ill-considered comment. Your lack of comprehension is no reflection on me or my consideration.

I don't care who your authority is, how senior they are, what their intent was or how you came to hear them speak. I know for a fact their original guideline was NOT enforceable. They had no choice but to change the regulation.

To re-write a guideline from “generally would” to “must” is a change not clarification. It was necessary for enforcement otherwise they would not have adopted the appendix.

Your highjacking of this thread to continue your pointless argument is unnecessary. But I will accommodate you.

 

[mark hurlock]

Mark, spot on. The FDIC, etc, in the creation of the updated Interagency Guidelines have so convoluted the areas they are to pertain to, that it simply has created more confusion than clarity. I personally do not believe the intent of these IA guidelines was to have appraisers develop an AS IS value of a single family home under construction.

Now once again, to Mark's example....why in the world would a Lender need an AS IS value on a home, that will not be the security for the mortgage, until it is 100% complete???

Someone please answer this for me? What do they care???? They do not care at all.

Too many examples so far pertain to commercial properties and tract developments.

Did anyone notice that on the Appendix A-D with the Effective date of April 2011 Section A.4140.1 that at the bottom of each page it states "Commercial Bank Examination Manual".

I think we need some real clarity here....again My personal example was of one home under construction in a subdivision, where multiple phases are already complete and there are already resales. If the lender will not lend any money on this home for the new, happy buyer, until the home is 100% complete, what is the purpose of an AS IS value for this Lender during the construction phase? At that point they have no "skin" in the game at all.

I am reaching out to my old time friends, mostly retired from high up in the Lending universe to add some clarity.

I agree. Whether or not this applies to a single unit is questionable since it is located within the section titled, Deductions and Discounts which applies to tract development, and multi-unit buildings.

Those “intent” on clarification didn't do it very well.

 

[George Hatch]

The "90% of you guys" characterization would only apply to you if you were in that 90%; a judgement I never passed on you. If you choose to consider yourself in that group then that's on you; your apparent outrage doesn't alter what I have seen when I teach these courses or review those reports.

And you did say something really stupid so I don't know why you're getting all torqued about me correcting that.


Think of it this way: 20 years from now when you actually know a little more about what you're talking about some wannabe lawyer is going to want to rewrite your history for you, too. You'll eventually get the opportunity to exercise a little patience and launch into a remedial explanation. You're just not there yet.

And FTR, whether you think the regs were enforceable as written or not, the feds most certainly have been enforcing them in that manner all along.

 

[mark hurlock]

The "90% of you guys" characterization would only apply to you if you were in that 90%; a judgement I never passed on you. If you choose to consider yourself in that group then that's on you; your apparent outrage doesn't alter what I have seen when I teach these courses or review those reports.

And you did say something really stupid so I don't know why you're getting all torqued about me correcting that.


Think of it this way: 20 years from now when you actually know a little more about what you're talking about some wannabe lawyer is going to want to rewrite your history for you, too. You'll eventually get the opportunity to exercise a little patience and launch into a remedial explanation. You're just not there yet.

And FTR, whether you think the regs were enforceable as written or not, the feds most certainly have been enforcing them in that manner all along.

Classic, you accuse me of outrage because I dismiss your condescending arrogance?

Would you feel better if I agreed with you?

Well, I don't, get over it.

 

[mark hurlock]

And FTR, whether you think the regs were enforceable as written or not, the feds most certainly have been enforcing them in that manner all along.

Considering the state of the banking industry, I would have to disagree and conclude nothing was being enforced by anyone.

 

[Mike P]

George, you did add clarification, the GSE's are exempt....

Therefore, if I am doing an appraisal for Chase, on a new home, to be purchased by an individual, the IA guidelines of AS IS as a supplement for the appraisal do not apply.

My reasoning stands is that I have done hundreds of appraisals for major N GA Banks, which sell directly to Fannie and Freddie, and for Chase, Wells, Flagstar, US Bank, that have never asked for an AS IS value of a home under construction, since, they do not care what that value is!!!! All they care is about what the home will be worth at completion, so it can be security for the mortgage.

George, if you have more insight on why a Bank in my above scenario would want an AS IS value, please tell me. I am baffled at this....seriously. It would make no sense for a Bank to request an AS IS value of a home under construction, since they are not making a loan on the construction of the home, but, on the final product only!!!

Am I missing something here? If you ask my wife, kids or grandkids, they might tell you yes!!!

Hopefully not.....It is still my opinion that the IA Guidelines have not been clearly written or understood by those, especially the AMC's in regards to how to apply them.

 

[Ken B]

I tried to point it out, but perhaps it wasn't obvious.

There are different rules for underwriting residential mortgages and for underwriting commercial mortgages. One can't use the rules from one in an effort to refute statements regarding the other.

A few excerpts from the OCC Handbook on Commercial Real Estate Lending are pertinent:

In its simplest form, ADC (Acquisition, Development, and Construction) lending may finance the land acquisition, land preparation, and construction of a single residential or commercial building. Often, however, ADC lending finances a single- or multiple-phase development of many units. ADC is highly specialized lending that requires a thorough understanding of its inherent risks. This section discusses the underwriting, policies, and controls that are necessary for prudent ADC lending.

ADC lending presents unique risks not encountered in the term financing of existing real estate. Assessing performance on a development or construction loan can be challenging because most are underwritten without required amortization or project-generated interest payments. Absent such objective performance measures, examiners must fully evaluate the projected cash flow of the project, compare actual progress to the initial plan, and when applicable, analyze guarantor support. This analysis must consider the feasibility of the project, given current conditions, planned construction, and the level of fully funded debt.

A developer may wish to borrow on an unsecured basis, often in the form of a line of credit, to acquire a building site, eliminate title impediments, pay architect or commitment fees, or meet minimum working capital requirements established by other construction lenders. Repayment of an unsecured front-money loan may come from the first draw against a construction loan. The bank extending such an unsecured loan should require the construction loan agreement to permit repayment of the working capital loan on the first draw.


Appraisals used to support construction loans must include the current market value of the property (often referred to as the “as is” value of the property), which reflects the property’s actual physical condition, use, and zoning designation as of a current effective date of the appraisal. If the highest and best use of the property is for redevelopment to a different use, the cost of demolition and site preparation should be considered in the analysis. OCC Bulletin 2005-32, “Frequently Asked Questions: Residential Tract Development Lending,” provides guidance in the valuation of collateral for ADC loans.
The construction loan appraisal must also include a prospective market value. The prospective market value upon completion (“as-complete”) is an estimate of the property’s market value as of the time that development is expected to be completed.

For residential models, the bank ordinarily obtains an appraisal for each model or floor plan that a borrower is planning to build and offer for sale. The model appraisal typically includes the value of a base lot in a particular development without consideration to the costs of, or value attributed to, specific options, upgrades, or lot premiums.
If the bank finances the construction of a residential tract development, an appraisal of the model(s) provides relevant information for the appraiser to consider in providing a market value of the development. That is, the value attributable to the models is used as a basis for estimating a market value for the tract development by reflecting the mix of units and adjusting for options, upgrades, and lot premiums. The market value should also reflect an analysis of appropriate deductions and discounts for holding costs, marketing costs, and entrepreneurial profit.
For construction of units that are not part of a tract development, a model’s appraisal may be used to estimate the market value of the individual home, if the model and base lot are substantially the same as the subject home and the appraisal meets the agencies’ appraisal requirements and is still valid. In assessing the appraisal’s validity, the bank should consider the passage of time and current market conditions.7 When underwriting a loan to finance construction of a single home, the bank should consider the value of the particular lot and any options and upgrades relative to the values in the appraisal of the model.

There are limited circumstances, however, when the structure of a proposed loan mitigates the need to obtain a tract development appraisal. If all of the units to be developed can be built and sold within a 12-month period, no discounting is required and the bank may use appraisals of the individual units to satisfy the agencies’ appraisal requirements and as a basis for computing the LTV ratio. The bank should be able to demonstrate, through a feasibility study or market analysis conducted independently of the borrower and the bank, that all units collateralizing the loan are expected to be constructed and sold within 12 months. For LTV purposes, the “value” in this isolated case is the lower of the sum of the individual appraised values of the units (“sum of the retail sellout values”) or the borrower’s actual development and construction costs. The borrower should maintain appropriate levels of hard equity (for example, cash or unencumbered investment in the underlying property) throughout the construction and marketing periods.
If the bank finances a unit’s construction under a revolving line of credit in which a borrowing base sets the availability of funds, the bank may be able to use appraisals on the individual units to satisfy the agencies’ appraisal requirements and as a basis for computing the LTV ratio. This is the case if the bank limits the number of construction starts and completed, unsold homes included in the borrowing base and if the bank satisfies the conditions described in the preceding paragraph. If the borrowing base includes developed lots or raw land to be developed into lots, the appraisal obtained by the bank must reflect appropriate deductions and discounts.

 

[Ken B]

But wait! There's more!

But I'm not going to PO Wayne and post it all here.

Perhaps a moral of the story is that appraisers are not formally trained in underwriting guidelines for either residential or commercial property. Therefore, it might be best to give the client the benefit of the doubt regarding their needs and provide them with the services they request, even if it is not understood why they request them.

 

[George Hatch]

That's actually a point that's well taken - the feds did slack off on enforcement for some years. But the wider point still stands - whether the rules as written would withstand a judicial appeal notwithstanding, their intent and the manner in which the feds promulgated their expectations never once waivered since those requirements went into effect.

And since we are engaged in appraisal practice and are not engaged in giving legal advice and are not engaged in an esoteric debate about the Constitutionality of the involvement of the feds in regulating mortgage lending it is their expectations that should matter to us. Not whether we can get away with refusing to comply with those expectations on the basis of the "unenforceable" verbiage in the regs.

Back when the Supplemental Standards Rule was still in effect (before it's function was replaced by the SOWR) USPAP itself was hardwired with Statement on Standards #10 which addressed the necessity to be aware of and comply with these requirements in those appraisals. That SMT was so long it had its own table of contents, and "as is" value had its own section.

So no, all the appraisers in this thread who say they're familiar with these requirements ARE NOT just perpetuating some outmoded appraisal myth that we've concocted in our heads.