The Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency on Dec. 18 issued a statement
to reinforce prudent risk-management practices related to commercial real estate lending.
The agencies noted substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks and an easing of CRE underwriting standards. The statement served as a reminder to financial institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor and manage risks arising from CRE lending. The statement reinforces existing guidance for CRE risk management and contains a table that lists interagency regulations and guidance related to CRE lending activities.
Appraisal Institute professionals should pay close attention to the statement, as Designated members, given their training and resources, are in a special position to assist regulated financial institutions. AI recommends that appraisers doing work for regulated financial institutions pay special attention to market analysis and include appropriate disclaimers in appraisal reports. In addition, AI encourages appraisers to review AI Guide Note 12, Analyzing Market Trends and take the Advanced Concepts and Case Studies course
The organizations noted that “increasing the appraisal threshold levels could have a negative impact on safe and sound real estate lending practices, as it likely would prompt many banks to significantly reduce attention to collateral risk management.” The letter also stated that the last time the issue of a threshold increase was raised, no stakeholders favored an increase.
Federal banking regulators are looking at the appraisal threshold level as part of a major review of regulations under the Economic Growth and Regulatory Paperwork Reduction Act. Community banks have made raising the threshold a major priority, testifying in Congress and during EGRPRA field hearings in Washington in December.
Still, the issue runs much deeper than it initially appears. Some banks are looking to avoid a fundamental risk management process in large sectors of the real estate market, not only because of an inability to find qualified appraisers or the cost of the appraisal itself, but because of the increased burdens surrounding the appraisal and the appraisal license. Like appraisal service providers, institutionally employed appraisers face numerous compliance obligations in maintaining — and even obtaining — their licenses to prepare appraisals and appraisal reviews. From a practice, licensing and management standpoint, this process has become extremely complicated and convoluted for banks.
All the calls for avoidance sheds light on the regulatory structure, pointing strongly to a need for modernization. Regulatory relief should be advanced not just for banks, but for appraisal professionals who are progressively being boxed into a corner by rule and regulatory obligations. The current push to opt out of the appraisal process is one more indication of the need for a fresh look at the appraisal regulatory structure and the need to identify more efficient and effective systems and operations.
The Appraisal Institute in a Dec. 1 letter to the U.S. Department of Housing and Urban Development
regarding its proposed rule on the disposition of its single-family properties, encouraged the use of appraisals while cautioning against expanding valuation methods to include such alternatives as unregulated broker price opinions and automated valuation models.
“We believe any property disposition program utilized by HUD should require at least one independent appraisal,” AI stated in its letter. Doing so “not only helps protect taxpayers from distressed sales below market value, but local communities from having properties ‘dumped’ on the market at below market prices. Quality appraisals are absolutely essential if HUD plans to reduce the inventory of single-family properties in a manner that minimizes losses to the Mutual Mortgage Insurance Fund and protects local communities.”
Additionally, AI encouraged HUD to obtain two value opinions from appraisers, one for market value and one for the property’s liquidation value. AI noted that doing so would “help the agency understand the range of risk exposure to the agency, with the liquidation value helping to illustrate the worst case scenario. Such services would provide cost-effective alternatives to less credible services such as BPOs and AVMs. If HUD is not utilizing them today, we urge the agency do so before turning to less credible alternatives.” AI publishes a Liquidation Value Addendum
that can be used by valuation professionals in this situation.
A rule that took effect Dec. 21 stipulates that anyone owning a small unmanned aircraft of a certain weight must register it with the Federal Aviation Administration's Unmanned Aircraft System
before it’s operated outdoors. Individuals who previously operated their UAS must register by Feb 19. Failure to register could result in civil and criminal penalties.
Owners using their UAS for hobby or recreation will only have to register once and may use the same ID for all their model UAS. However, the online registration system does not yet support registration of small UAS used for any purpose other than hobby or recreation. The FAA is working to address drone use for business, and rules are expected to be released this spring.
The Appraisal Institute, in an April 2015 letter to the FAA
, said it sees drones as being of considerable use to valuation professionals who could use them to access difficult to reach areas on a structure or property, make remote structural measurements and market appraisal services, to name a few.
The Consumer Financial Protection Bureau on Oct. 15 released its final rule on the Home Mortgage Disclosure Act (Regulation C)
. For the first time, the final rule raises the specter of HMDA enforcement in the area of valuation, as values relied upon in credit decisions will be reported as part of HMDA compliance.
Specifically, the rule requires the reporting of the value relied upon by the financial institution in making the credit decision as part of the HMDA reporting framework. The final rule clarifies if a financial institution relied on an appraisal or other valuation of a property when calculating the loan-to-value-ratio, then that value will be reported. Likewise, if a financial institution relied on the purchase price of a property when calculating the loan-to-value ratio, then the purchase price will be reported as the property value.
In an October 2014 comment letter
to the CFPB, the Appraisal Institute asked the CFPB to include any type of valuation in the disclosure requirement for the value relied upon, whether the value came from an appraisal, an automated valuation model or a broker price opinion. AI stated that failure to include any type of valuation might create an incentive for financial institutions to avoid appraisals, which are developed using uniform standards by practitioners who have completed specific valuation education.
The Federal Housing Finance Agency on Dec. 15 released a proposed rule
that would require Fannie Mae and Freddie Mac to submit plans for improving the distribution and availability of safe and sound residential mortgage financing in underserved markets.
Under the rule, the government-sponsored enterprises would be required to submit three-year draft plans detailing their planned activities and objectives for manufactured housing, affordable housing preservation and rural housing.
Discussion of appraisals is included within the proposed rule, mostly highlighting steps that the GSEs have taken in recent years to clarify the seller servicer guidelines relating to rural appraisals.
The U.S. Department of the Treasury on Jan. 7 released notice
on the Community Development Financial Institution Bond Guarantee Program, which supports lending by providing guarantees for bonds issued for eligible community or economic development purposes, as authorized by the Small Business Jobs Act of 2010.
Through the CDFI Bond Guarantee Program, the secretary of the Treasury makes debt available to CDFIs from the Federal Financing Bank. The loans provide long-term capital previously unavailable to CDFIs, and injects new and substantial investment into the nation's most distressed communities.
Within the program, appraisals are required for certain collateral, including real estate, leasehold interests, fixtures, machinery and equipment, movables stock valued in excess of $250,000 and contracted revenue stream from non-Federal creditworthy counterparties. Secondary Loan collateral shall be valued using the cost approach, net of depreciation, and shall be required for the following: accounts receivable, machinery, equipment and movables and fixtures.