On Wednesday, I had the pleasure of moderating an EDR Insight webinar titled“An Inside Look at the Challenges Facing Lenders and Appraisers Today” with the Appraisal Institute’s Bill Garber and appraisal/environmental expert with Diversified Real Estate Consulting, Brian Ginter. Joining us were more than 500 professionals, including appraisers, environmental risk managers, loan officers, portfolio managers and others tasked with managing risk for financial institutions.
The policies for property valuations and environmental risk management are squarely in the spotlight, and compliance has become more than a full-time job at any bank. The purpose of the event was to address the latest word from regulators, as well as what banks can and should have in their policies to ensure they are in compliance with the latest requirements.
After a robust 15-minute Q&A session, the webinar ended with a few questions still outstanding. This brief includes the speakers’ answers to those questions, with a link to the full replay of the webinar. EDR Insight wishes to extend our sincere gratitude to Bill and Brian for taking the time to share their insight and expertise on this important topic. Below are their answers to the outstanding questions:
Question: Are there more efforts to provide guidance for appraisers on the determination of liquidation values on commercial properties? This is important for banks to enable them to determine collateral values on troubled assets. While troubled assets continue to decline, there continues to be some properties classified as such. There does not appear to be consistent analysis or methodology for determining liquidation values. Any advice?
Bill Garber, Director of Government and External Affairs, Appraisal Institute:
Great question. It’s a good idea to obtain appraisals that provide opinions of the market value and liquidation value when dealing with distressed commercial real estate. This helps the bank understand the whole range of short- and long-term risks when studying workout scenarios. We recently published two Guide Notes that are relevant to this subject, available below:
1. Guide Note 11: Comparable Selection in a Declining Market
2. Guide Note 14: Concept of Exposure Time
Brian Ginter, Director – Executive Staff, Diversified Real Estate Consulting Network:
This is a “Quick Sale Value” and banks don’t/shouldn’t always need to twitch to this value. It is this type of action by Special Asset departments that keep my investment company, and others, in business. What the bank needs is to look at each REO asset individually and develop the best “investor price” to sell the asset for. I developed a spreadsheet for Burke & Herbert Bank to address this challenge and the bank recovered over $1 million above what they were going to liquidate the asset at. The approach bases the final selling price on the desired, “stress-tested” profit goals—rather than some arbitrary quick sale period.
Question: I have a training question from the bank perspective. If I was looking to have bank staff review appraisers, what would be the three top training resources that you’d recommend to get them adequately started to handle this responsibility?
Ginter: It’s not clear if the question refers to residential or commercial real estate, but I’d say #1 is USPAP. Second, I’d recommend a basic review course in appropriate property class. Beyond that, it really comes down to the individual’s skill and experience in real estate (appraisal, sales, construction, etc.).
Question: I’m not sure I’m comfortable with this concept of ordering the appraisal and environmental reports at the same time. If they come back at the same time, and the environmental report identifies issues, are you saying that we really need to have the appraiser revise the value conclusion? If the original appraisal was prepared in compliance with USPAP, why do we need to have it revised?
Ginter: Yes, you would. You are required to tell the appraiser if there are known environmental issues associated with the properties. You will see this requirement clearly spelled out in the OCC guidance that I referenced in my presentation. It is also pasted into the last few slides. Given the regulators’ emphasis on appraisals considering environmental risk, and environmental risk assessments considering appraisal information, I would advise you to start thinking about a proper policy and procedure at your bank. I am already doing this for a number of community banks.
Thanks to everyone who attended the webinar. If you missed it and would like to tune in, the replay is now live. Special thanks to Bill Garber and Brian Ginter.
We at EDR Insight will continue to educate on the policy development topic so we hope to have you back for a future event and are always open to suggestions for future topics.