Chief Appraisers Roundtable May 12, 2010 David Rosenthal, MAI, FRICS President & CEO
WASHINGTON A compromise measure requiring the government to conduct a one-time and unprecedented audit of the Federal Reserve's emergency-response programs was unanimously approved Tuesday by the Senate as part of sweeping bank reform legislation. 1 MarketWatch (05/11/10)
"I believe that the weakness in the CRE market requires prompt and robust responses from the regulators. I urge you to redouble your efforts to provide appropriate oversight of this vital component of our economy. 1 1 Senate Banking Committee Chairman Christopher Dodd, American Banker (02/23/10)
Appraisal Institute Analysis Shows Two-Thirds of Failed Banks Cited for Appraisal Problems An analysis conducted by the Appraisal Institute of failed banks shows that nearly two-thirds had been previously cited by federal bank examiners or had ongoing appraisal administration problems, highlighting a significant weakness in many struggling financial institutions. 1 1 Appraisal Institute
The FDIC Inspector General cited examples: Failure to obtain current appraisals or perform adequate appraisal reviews. Bank frequently relied on stale appraisals. Inadequate control of the lending function, including appraisals. Poorly explained upward adjustments to the appraisal values. 1 1 Appraisal Institute
The agencies are planning to release the appraisal guidance in June. Sabeth Siddique, FRB, 5/10/10
1 Based on interviews with representatives from FRB, FDIC and OCC.
Banks should have their own in-house policy. When a collateral-dependent loan is classified as impaired and put on non-accrual. Regulatory preference is to see re-appraisals every 6 months. Once an appraisal is over a year old, it makes regulators uncomfortable to see it relied upon. This can vary by institution based on: the health of the institution the bank s concentration in CRE loans
What is a reasonable basis for projecting absorption of units? Should be based on current actual sale activity Use a stark assessment of current market conditions Should not be factoring in projections of improving market conditions Actual activity should be revisited and re-analyzed quarterly
Infrequently developed in appraisal reports. Market supported deductions vs. rule of thumb approach. Not needed for regulatory purposes. Can be useful to help banks solve their business problems. Current appraisals are more important to regulators than with DV or LV.
What should be deducted from As Is Market Value in order to estimate Fair Value of CRE? Selling costs (commissions, etc.) Holding costs - Discount for extended exposure time (over 1 year) Refurbishment costs to make the property marketable Past-due property taxes Should appraisers be determining Fair Value? No, but they could be helpful in developing the deductions for bankers to make.
A FAS 114 discounted cash flow analysis: Must be thoughtful with market support for assumptions. Must not just assume refinance or extension at maturity. The term of the cash flow analysis is discretionary for the bank, based on their analysis of the likely scenario(s).
A bank s appraisal review process must be clear and well documented. All appraisals must be reviewed either internally or externally. The appraisal review process should be risk-based: o Smaller or more conservative loans may be fine with a lighter internal review. o Larger or riskier loans require a robust review. Compliance reviews are not sufficient; a review should include the reviewer s opinion of the value conclusion. Banks should be tracking appraised values vs. actual recoveries from sales of REO.
To state the facts frankly is not to despair the future nor indict the past. John F. Kennedy
Speaker s Biography David Rosenthal, MAI, FRICS has over 26 years of commercial real estate appraisal experience working with lenders, equity sources, attorneys, and public agencies. Prior to co-founding Curtis-Rosenthal, Inc. in 1983, he worked at Security Pacific National Bank as a corporate banker. He has an MBA from the Kellogg Graduate School of Management at Northwestern University, and a BS in finance from the University of Florida. He lectures on real estate at UCLA and Loyola Marymount University, and is a frequent author for commercial real estate publications. His Economic Update Report is a regular feature on www.rentv.com. Subscribe to Rosenthal s Economic Update Report by contacting him at: drosenthal@curtisrosenthal.com 310-215-0482 www.curtisrosenthal.com