EDR Insight is pleased to offer readers this two-part series on commercial appraisal review forms, authored by Mitch Kreeger, containing valuable advice for lenders and reviewers in this era of highly-regulated lending operations.
COMMERCIAL APPRAISAL REVIEW FORMS: ADVICE FOR LENDERS AND REVIEWERS (PART I OF II)
by Mitch Kreeger, MAI SRA MBA
It is established that lending institutions need to obtain appraisals or collateral valuations prior to making real estate related lending decisions. These appraisals and appraisal vendors are now highly regulated as to who is allowed to do an appraisal, screening and monitoring vendors, and what minimum information must be in an appraisal report. If both appraisers and appraisal reports are already regulated, why are there formal appraisal review requirements and appraisal review vendors that need to be managed? If Appraisers know they must be competent and comply with USPAP, why do we need formal Reviewers and review reports? Are all commercial appraisal review forms the same?
FIRREA (1994) established protocols for creating and enforcing Uniform Standards of Professional Appraisal Practice (USPAP) which includes Standard 3: “Appraisal Review, Development and Reporting”. Federal banking regulators (OCC/OTS, FRB, FDIC, and NCUA) issued Interagency Appraisal & Evaluation Guidelines in December 2010. Section XV “Reviewing Appraisals and Evaluations” lays out federal regulatory lending guidelines regarding Reviewer Qualifications, Depth of Review, Resolution of Deficiencies, and Documentation of the Review. Substantial adherence to Interagency “guidelines” and other Supervisory guidance are highly suggested and may be enforced upon examination especially with respect to safe and sound banking practices. Regulators do not dictate lender policies or procedures, yet they note (IA&EG, Section VIII):
“the appraisal must conform to generally accepted appraisal standards as evidenced by the USPAP promulgated by the Appraisal Standards Board of the Appraisal Foundation unless principles of safe and sound banking require compliance with stricter standards.” “USPAP identifies the minimum [underline added] set of standards that apply in all appraisal, appraisal review, and appraisal consulting assignments.”
As part of their Supervisory Policy, IA&EG states that
“examiners will review an appraisal or evaluation to determine whether the methods, assumptions, and value conclusions are reasonable. Examiners also will determine whether the appraisal or evaluation complies with the Agencies’ appraisal regulations and is consistent with supervisory guidance as well as the institution’s policies. Examiners will review the steps taken by an institution to ensure that the persons who perform the institution’s appraisals and evaluations are qualified, competent, and are not subject to conflicts of interest.”
IA&EG notes that “an institution’s board of directors or its designated committee is responsible for adopting and reviewing policies and procedures that establish an effective real estate appraisal and evaluation program…[that]…should provide for the independence of the persons ordering, performing, and reviewing appraisals or evaluations; establish selection criteria and procedures to evaluate and monitor the ongoing performance of appraisers; ensure that appraisals contain sufficient information to support the credit decision; ensure that appraisals comply with the Agencies’ appraisal regulations and are consistent with supervisory guidance; provide for the receipt and review [underline added] of the appraisal report in a timely manner to facilitate the credit decision” and other program recommendations. Thus, appraisal reviews are established in federal guidance and should address all of the issues noted above. [Refer to USPAP Standard 3 and IA&EG for more on why and what of appraisal reviews.]
Examiner “Hot Buttons”
Bob Parson, MAI, OCC National Appraisal Policy Specialist, offered his professional advice with respect to appraisal reviews (Southern CA Appraisers Group, Federal Reserve Bank – LA, 10/28/15):
- “Nothing trumps the vendor selection and engagement process” for due diligence
- “State Certification or Licensure does not connote competency”
- Reviewers must have appropriate expertise and knowledge
- All commercial appraisals must be reviewed:
- Lower risk transactions can receive less technical reviews
- Higher risk transactions or complex properties must have more comprehensive reviews
- Review process is for resolving deficiencies and documentation:
- If a deficiency issue cannot be resolved, a second appraisal is okay
- If Reviewer is a credentialed appraiser, USPAP allows Reviewer to provide an opinion of value
- Deficiency resolution is to be documented
- A database should track chronology of assignment from before to after resolution (show resolution steps)
- Qualitative (Judgment) Review Process:
- Provides “credibility, believability, sufficiency of content (information and analyses), and confidence” (assuming regulatory compliance is also met)
- “Given data constraints, were comparables appropriate?”
- Quantitative (Measurement) Review Process: (examples…)
- Is the date of sale within the assignment or regulatory “rules”?
- Is the distance between the subject and comparables reasonable for the assignment?
- Checks arithmetic
- “Appraisal Review is a PROCESS, not a form.”
- “A form cannot exercise qualitative judgment”
- “An appropriate review requires Reviewer to exercise qualitative judgment regarding the quality of the appraisal report being reviewed”
- “Review Process: Does the appraisal lead the reader to the same conclusions?”
Thus, the regulatory community has established that appraisal reviews and competent SME Reviewers are necessary components of an institution’s lending program. Regulators provide guidance on “why and what” of appraisal review – though not much on “how” – that may be enforced to promote and protect safety and soundness of a lender’s program.
In Part II of this article, I will offer more substantive discussion on the “how”, best practices, and some examples of commercial appraisal review formatting “do’s and don’ts”.
ABOUT THE AUTHOR
Since 1980, Mitch Kreeger provides real estate appraisal and review services on residential and commercial valuation assignments, environmental and seismic risk management services for lenders, plus consulting services related to policies and procedures, regulatory compliance, and appraisal / environmental risk in-house or outsource function design. Professional services also have included apartment acquisition investment DCFs, budget analysis, construction lending inspections and analysis, and real estate market trend analysis. Mitch’s client base ranges from very small to very large lending institutions, corporate and individual property owners, investors and syndicates, municipalities and redevelopment agencies, and legal services; however, most of his career has been as internal appraisal management or staff with various institutional lenders. Mitch is considered a Subject Matter Expert (SME) on various valuation, environmental and seismic risk, and regulatory compliance topics by peers nationwide, and volunteers or is sponsored as guest speaker, panelist, author, and network blogger. Mitch is currently Chief Appraiser and Principal Consultant at Kreeger Consulting, a private appraisal / environmental / seismic risk consulting services firm that offers commercial appraisal reviews, outsourced Chief Appraiser duties, and advisory services to lenders on regulatory compliance, efficient appraisal / environmental risk functions, and effective policy updates. For more information and related advisory services, Kreeger Consulting is one of several SME firms that offers free initial consultation on appraisal reviews, report formatting, and vendor management.
Mitch Kreeger, MAl SRA MBA
Principal Consultant, Kreeger Consulting: Appraisal Review, Environmental & Seismic Risk Policy Manager
Mitch’s LinkedIn Profile
“Appraisal Leader for Tomorrow’s Environment”