3 things you should know about appraisals

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Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 1 JOIN. ENGAGE. LEAD. 3 THINGS YOU SHOULD KNOW ABOUT APPRAISALS An Excerpt from “2017 Industry Insights: Perspectives from the Front Line” by RMA’s Credit Risk Council

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Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

1

JOIN. ENGAGE. LEAD.

3 THINGS YOU SHOULD KNOW

ABOUT APPRAISALS

An Excerpt from “2017 Industry Insights:

Perspectives from the Front Line”

by RMA’s Credit Risk Council

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CURRENT APPRAISAL ISSUES

Appraisals continue to be a very

important and required valuation tool for

both owner-occupied and investor real

estate transactions.

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CURRENT APPRAISAL ISSUES

• Independent ordering and

review, separate from

relationship managers and

approval officers, remains

critical.

• There are, however,

ongoing discussions about

issues with appraisals and

three are outlined following.

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CURRENT APPRAISAL ISSUES

The appraisal threshold

Cross-state appraisals

Inconsistency in appraisal methods

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The Appraisal Threshold

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Proposal to

increase the

threshold

THE APPRAISAL THRESHOLD

Banking agencies are developing a

proposal to increase the required

appraisal threshold for commercial real

estate (CRE) transactions from $250,000

to $400,000.

$250K $400K

Source: The Federal Financial Institution Examination Council’s Joint Report to Congress.

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Proposal to

increase the

thresholdThe report currently

proposes to leave

the residential real

estate threshold at

$250,000.

The $1,000,000

threshold for owner-

occupied real estate

business loans is

still under review.

THE APPRAISAL THRESHOLD (CONT.)

$250K

$1M

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Cross-State Appraisals

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CROSS-STATE APPRAISALS

Another issue is the legality

of doing technical appraisal

reviews in states other than

the one(s) where the reviewer

is state certified.

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CROSS-STATE APPRAISALS (CONT.)

All states have their own requirements for appraisal reviews.

• The reviewer is certified in some state.

• And the reviewer does not modify the value.

• If the reviewer opines to a value different than the appraisal, he/she must be certified in the state where the property is located.

Some states allow a review of a property that is located in that state as long as:

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Other states’ laws dictate that in

order to complete a technical

review of a real estate appraisal

in their state, the reviewer must

be certified in the state where

the property is located in all

situations.

CROSS-STATE APPRAISALS

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This requirement would theoretically require a reviewer that does review work nationwide to be

certified in all 50 states even if he/she does not opine to a value.

However, this is an issue that needs to be resolved on the federal level and the federal government

has remained silent thus far.

CROSS-STATE APPRAISALS

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Inconsistency in Appraisal Methods

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INCONSISTENCY IN METHODS

Inconsistency in methods to

determine the allocated

values of a going

concern is

another

controversial

subject.

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INCONSISTENCY IN METHODS (CONT.)

Typically, properties such as

hotels, convenience stores, and

senior housing sell as a going

concern.

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INCONSISTENCY IN METHODS

For loan-to-

value (LTV)

purposes, a

real estate loan

for a going

concern must

be allocated to:

• Separate “real estate value only.”

• Business enterprise value.

• Furniture, fixtures, and

equipment (FF&E) components.

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INCONSISTENCY IN METHODS

There are several

acceptable methods for

doing the allocation, but they result in

varied conclusions.

The challenge is how to get

consistency in the allocation.

One thought is to require multiple

methods in each appraisal that would make it easier for the reviewer to reconcile multiple

appraisals of the same property.

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The Credit Risk Council supports

professionals who are responsible for

establishing, maintaining, or carrying

out credit risk management policies.

The council focuses on funded and

off-balance-sheet risk management,

including capital markets activity, and

other forms of credit intermediation

and risk mitigation.

About RMA’s Credit Risk Council

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For additional information about

credit risk management,

visit

www.rmahq.org/credit-risk/

LEARN MORE

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SHARE THIS PRESENTATION

Visit http://www.rmahq.org for information on risk management.

RMA is a member-driven professional association whose sole

purpose is to advance sound risk principles in the financial services

industry.

RMA helps its members use sound risk principles to improve

institutional performance and financial stability, and enhance the risk

competency of individuals through information, education, peer

sharing, and networking.

Become a member today.