Category Archives: Reviewer Thoughts & Tips

The main attempt of this blog is for me to give back to the real property valuation industry. I can’t take my knowledge with me when I leave this world. So, my goal is to share everything I know through writing articles, teaching classes and seminars, and this blog.

I usually receive several questions a week from fee appraisers, appraisal reviewers, and chief appraisers regarding appraisal reports, FIRREA, or USPAP. Hopefully, these will provide most of the content for this blog. In this way, we can all learn from the same issue under discussion. Obviously, items will be redacted as needed to maintain confidentiality.

If I hit a lull in inquiries, I have a huge treasure trove of topics to draw on. I will try to discuss interesting topics I have encountered in international reports. It is a neat world out there and us American valuers should be amazed at how the rest of the world handles various items.

Yes, I will give my interpretation of FIRREA and USPAP. Everyone knows I am not shy. However, to CYA, I need to give the standard verbiage that my interpretations are not legal interpretations….they have not and cannot be approved by examiners and regulators. Each Bank should contact their specific examiner and/or the appropriate regulator in Washington DC that interprets FIRREA.

HOUSING MARKET SHOWING SIGNS OF TOPPING

APRIL 14, 2022 – The housing market has been incredibly strong since the pandemic started two years ago. Prices are increasing at a record pace. The supply of houses for sale is at an all-time low. Of course, what goes up, must come down. But, when…Tops in financial markets take awhile to form. Bottoms are usually a spike panic low – a V-shape.
We are starting to hear of markets where list prices are being lowered in mass. With mortgage rates up from around 3% last Fall to 5% this week, the number of potential buyers has dropped by many millions.
It will take awhile for the momentum to slow, stop, and then reverse. But, the signs of this occurring are in place and starting to mount.
One leading indicator I follow peaked in the 1st quarter of 2006. This was a full 2.5 years before the Lehman Brothers event the public recalls as being the start of the last recession. Of course, the recession started in 2005 and 2006 and Lehman Brothers (and others that went under) was the end result of the decline that had already occurred. In fact, this indicator bottomed in the 1st Quarter of 2009 and turned up from there.
This same indicator peaked in early December 2021. It has declined 29% since then. That doesn’t mean home prices will decline this much. (For perspective, the leading indicator declined about 85% and house prices declined about 30%.) It just suggests a peak in the housing market is on the horizon. The Case-Shiller U.S. National Home Price Index topped out at the end of the 2nd Quarter in 2006. Just a few months after the leading indicator suggested it would. I think the current momentum is too strong to have prices turn down this year. In fact, it will be tough to have prices turn down next year. But, it is now a decent chance of occurring.
Economists will confirm that as the housing market goes, so goes the overall economy. If the housing market slows done and rolls over, expect the same for the national economy.

Shalom,

The Mann

APPRAISAL REVIEW QUESTION

FEBRUARY 22, 2022 – I received the following question:
Q: If I as a bank appraiser chose to do an in-house appraisal, will it need to be reviewed? If so, what is the benefit and why not just use one of my vendors?
As appraisals are rarely done in-house, I have never thought about this situation. I contacted the Regulators and received the following answer.
A: When the residential threshold was increased it also amended the agencies’ appraisal regulations to require regulated institutions to subject appraisals for federally related transactions to appropriate review for
compliance with USPAP. This became effective January 1, 2020 and is now part of the regulation. As such, a bank can be cited for a violation of law if the review is not completed.
We do not dictate who performs the review only that the reviewer is competent and independent of the transaction; the reviewer can be from the same appraisal department as the individual who performed the appraisal. The bank may perform the review internally or out-source the review.

Now we all know. As always, feel free to ask me any question regarding FIRREA. If I don’t know the answer, I will find it out.

Stay well and safe out there,
The Mann

DATE OF VALUE DIFFERS FOR APPRAISALS AND EVALUATIONS

JANUARY 8, 2021 – It only took the Interagency Appraisal and Evaluation Guidelines (IAEG) document being out for a full 10 years for me to be made aware of the difference in Date of Value for Appraisals versus Evaluations.  As they say, you learn something every day!

For Appraisals, the IAEG states:

The estimate of market value should consider the real property’s actual physical condition, use, and zoning as of the effective date of the appraiser’s opinion of value.  (emphasis added)

In my 35 years of doing appraisals and appraisal reviews, the ‘Date of Value’ has always been the last date the appraiser(s) inspected the subject.  Usually, there is only one inspection and that is the Date of Value.  Of course, this is for Market Value and Market Value ‘As Is.’  We are not talking about prospective values.

For Evaluations, the IAEG states:

Provide an estimate of the property’s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date that the analysis was completed), with any limiting conditions.  (emphasis added)

‘The date that the analysis was completed’ is what us valuers call the Date of Report.  The Date of Report can be the same as the Date of Value, but that rarely occurs.  For appraisals, nearly 100% of the time the Date of Report comes after the Date of Value.

In conclusion, the IAEG wording indicates that the Date of Value for an Appraisal is what it has always been.  However, the Date of Value for an Evaluation is the Date of Report.

For Evaluations, I have always assumed the Date of Report was also my Date of Value.  I am not sure why.  I just felt that my analysis did indeed go thru the day I was finishing the Evaluation.  So, that was my Date of Value.  Blind luck I guess.

As an aside, it has been suggested that Evaluators add an Extraordinary Assumption to their Evaluation Report that assumes no material changes have occurred between the date the subject was inspected and the Date of Report.  Probably not a bad idea.  I won’t digress into my rant that I don’t like including Appraisal/USPAP items (e.g. Certification, Hypothetical Conditions, Extraordinary Assumptions, et al) in Evaluations.  It’s your Evaluation, do what you want to CYA.

Lastly, I have checked with the Regulators and sure enough this is a difference that was overlooked.  Hopefully, in the next revision this will be addressed.

Happy New Year!

The Mann

 

GEORGIA CLARIFIES LAW ON EVALUATIONS

SEPTEMBER 26, 2020 – The following is from the Appraisal Institute’s Washington Report:

The Georgia Real Estate Commission & Appraisers Board on July 30 adopted a rule change that “eliminates language that has caused confusion in the industry concerning when Georgia appraisers can conduct evaluations.” The change addresses the reporting format for evaluations that are prepared by appraisers for financial institutions that are not regulated by a federal financial institution’s regulatory agency.
The previous rule stated that evaluations are allowed to be “prepared in any reporting format, such as, but not limited to, a self-contained appraisal report, a summary appraisal report and a restricted use appraisal report if the reporting format meets the requirements of the nonfederal financial institution.”
The updated rule, which took effect Aug. 19, removes specific references to the transactions for which an appraiser may provide an evaluation, stating instead that appraisers can provide evaluations “for any transaction that qualifies to be performed as an evaluation under the Interagency Appraisal and Evaluation Guidelines.”
The rule also eliminates enumeration of an evaluation’s required content in favor of language that states, “at a minimum, the development and content of an Evaluation Appraisal shall comply with the guidelines set forth in the Interagency Appraisal and Evaluation Guidelines.”

THE APPRAISAL OF REAL ESTATE – 15TH EDITION

SEPTEMBER 26, 2020 – The Appraisal Institute has published the latest edition of the industry’s bible.  I will let them describe noteworthy items in the new edition.  See below.  You can purchase it at their website.

“The Appraisal of Real Estate,” 15th edition, is a book that fits current times. It reflects a renewed commitment to the essential principles of appraisal and the sound application of recognized valuation methodology. In addition to updated information on changes in real estate markets and valuation standards, longtime readers of “The Appraisal of Real Estate” will notice these significant changes in this edition:

  • New chapters focused on applications of market analysis and highest and best use analysis;
  • Additional emphasis on identifying the property rights to be appraised in an appraisal assignment; and
  • Deeper discussion of accepted techniques for allocating value among real estate, personal property and non-realty items.

In this book, readers will notice the expanded discussion of market analysis and highest and best use, with new chapters clarifying these important concepts and demonstrating procedures for their application. Readers will also notice the relationship between market analysis and highest and best use is made explicit and described in a step-by-step analytic procedure. Lastly, the major development in this new edition is the emphasis on the necessity of definitively describing the property rights to be appraised in an appraisal assignment to ensure that all the necessary steps are taken to produce a credible value conclusion.

Order your copy today!

NATIONAL SUICIDE PREVENTION MONTH

September is National Suicide Prevention Month.  Albeit, we should all do all we can to help people we are concerned about throughout the year.  Every day.   Never stop.  Never give up.

This one hits home for me.  Next month on my birthday October 15th it will be the 30th anniversary of my dad committing suicide.  He obviously chose my birthday so I would always remember it.  As if I wouldn’t remember any other date he would have done it on!

I understand the genetics of Depression and, as expected, I couldn’t avoid the power of the genes.  It’s about 16 years now that the daily fight has gone on.  At least it is still going on, eh:)

If you or anyone you know suffer from Depression, or any other Mental Illness, (say it out loud over and over until you get used to saying it….just like saying cancer or diabetes….it’s just a disease like any other….it is not something to be ignored and swept under the rug as we have done forever), please call 1-800-273-8255, seek professional help, and keep talking.

Promote National Suicide Prevention Month

You, or the person you know, are here to make a difference in the life of one or more people.  You need to stay here.  You will make a difference!

Godspeed to all.

As a reminder, please go to YouTube and listen to Morgan Wade’s The Night.  I listen to it most every day.  Great lyrics.

The Mann

 

WELCOME SOUTH DAKOTA TO THE EVALUATION WORLD

JUNE 29, 2020 – South Dakota has become the 11th state to allow licensed/certified appraisers to perform non-USPAP Evaluations.  We have 39 more to go:)  When we get back to in-person classes, if you are in a state that allows non-USPAP Evaluations, I have a 7-hour seminar on Evaluations and Validations that I will gladly come and teach.  I don’t teach over the web.  I can only share my 28 years of experience with Evaluations in person.  The Appraisal institute’s news item on this follows:

South Dakota Passes Legislation Allowing Appraisers to Perform Evaluations

South Dakota Gov. Kristi Noem on March 4 signed HB 1127, legislation that allows appraisers to provide real property evaluations to federally regulated financial institutions. When the law takes effect July 1, the state will join at least 10 others that allow appraisers to provide evaluation services. Several other states are considering similar laws.
Evaluations provided by appraisers must conform to Interagency Appraisal and Evaluation Guidelines. South Dakota’s secretary of the Department of Labor and Regulation will be authorized to promulgate rules relating to “exemptions and standards allowing appraisers to perform an evaluation for a federally insured depository institution.”
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Everyone stay safe.
The Mann

VALIDATIONS

MAY 29, 2020 – Validations are the little known and little used product that get overlooked in the world of Appraisals and Evaluations.  The December 2010 Interagency Appraisals and Evaluations Guidelines (IAEG) document has the following section that addresses Validations:

XIV. Validity of Appraisals and Evaluations
The Agencies allow an institution to use an existing appraisal or evaluation to support a subsequent transaction in certain circumstances. Therefore, an institution should establish criteria for assessing whether an existing appraisal or evaluation continues to reflect the market value of the property (that is, remains valid). Such criteria will vary depending upon the condition of the property and the marketplace, and the nature of the transaction. The documentation in the credit file should provide the facts and analysis to support the institution’s conclusion that the existing appraisal or evaluation may be used in the subsequent transaction. A new appraisal or evaluation is necessary if the originally reported market value has changed due to factors such as:
 Passage of time.
 Volatility of the local market.
 Changes in terms and availability of financing.
 Natural disasters.
 Limited or over supply of competing properties.
 Improvements to the subject property or competing properties.
 Lack of maintenance of the subject or competing properties.
 Changes in underlying economic and market assumptions, such as capitalization rates and lease terms.
 Changes in zoning, building materials, or technology.
 Environmental contamination.

Validations answer one simple question – is the value of the real estate collateral equal to or greater than the value in a prior Appraisal or Evaluation?  If so, then that value can be brought up to today.  If not, then a new Appraisal or Evaluation is needed.

Validations are useful in level to rising markets.  They are not very useful in the current market conditions.

However, not all property types have experienced a value decline this year.  In general, industrial properties and national tenant leased properties where the tenant has a bond rating A and above, are still candidates for Validations.  Apartments might be depending on the age of the prior Appraisal or Evaluation and the property location.

I have updated the Validation Report that I originally developed in 1994.  This report is intended to be used by internal bank employees.  It is not for use by fee appraisers, as it does not comply with USPAP.  If you are a bank employee and want a copy of my report template, just email me at GeorgeRMann@Aol.Com.  I will send it to you for free:)

It took me 25 years to finally get Evaluations to be mainstream.  Validations are next.  They are under utilized.  Albeit, today’s market is not ideal for them.  But, we will get back to market conditions where they are useful again.  My plan is to design a Restricted Appraisal Report (RAR) specific to the Validations need for fee appraisers to use.  But, at this time, this is not needed for the most part.

Again, bank staff please contact me if you want a copy of my template.

Everyone stay safe.

The Mann

CAN LOAN OFFICERS TALK WITH FEE APPRAISERS? YES, BUT…..

April 30 – In the past 30 years, my wife and I have worked at 4 large banks ranging in size from $150 Billion to over $1 Trillion.  At all of these banks loan officers were allowed to talk directly with fee appraisers about the subject collateral.  Obviously, there were important restrictions on what could not be discussed – e.g. value.

As many banks do not allow loan officers to talk with appraisers at all, I took a survey of some Chief Appraisers and Chief Credit Officers to get their viewpoints.  Their anonymous responses are below.

First, I talked with the Federal Regulators that write and interpret FIRREA guidance.  It is not against any law or guidance to allow loan officers to talk with fee appraisers directly.  Each financial institution can decide how they want to handle this issue.  Those institutions that allow such contact should provide training to their loan officers and also make it clear to their fee appraisers what is permitted to be discussed.  ((NOTE: I promise the Regulators I will not publish any written responses they provide.  Therefore, I cannot provide their exact reply.  Feel free to call them if you doubt the above is their response.))

I always like to present both sides of an issue.  Then you can decide which side you prefer and have information to defend your stance.  The responses follow in no particular order.  Editing is minimal and mostly limited to getting rid of the use of my name or any personal discussion or anything that would identify the author.  Again both sides are represented, so there is no attempt to influence you to go one way or another.  It is you and your financial institution’s decision.

Stay safe.

The Mann

If there is information that is pertinent to the appraisal, then yes, the LOs or property contact can provide property specific information during the appraisal process. It helps in the exchange of information to the appraiser. However, many times, they would rather communicate through us, but it just depends. They know they cannot discuss value, fees or changing delivery dates.

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We require any and all info to go through the appraisal department, however if there are complex issues regarding the assignment and the loan officer has an extensive knowledge of the property we may refer the appraiser to them if it is necessary for credible assignment results.

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We recently provided training on AI rules, prohibited topics, and provided examples of various influence e.g. bribery, coercion, etc.  Once a lender has undertaken training he may speak to an appraiser after engaged, but only in response to inquiries regarding property.  I prefer all conversations are monitored by my team.  Lenders are not allowed to initiate dialogue with an appraiser at any time or discuss appraisal after receipt of report.

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during the assignment, the appraisal department must be aware in advance of all communication between the loan officer and the appraiser.  This allows the department to monitor any potential change in scope of the appraisal and oversee appraiser independence.

The reality is that some loan officers can be trusted not to “cross the line” in their conversations with appraisers, and others, maybe not so much.  Our policy allows the appraisal department access to those conversations.  The bias of the borrower is obvious and expected by appraisers.  However, since the appraiser’s client is the bank, and loan officers are representatives of the bank, their influence on the appraiser can be significant.  Independent oversight is therefore important.

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after the assignment is awarded, we do not categorically restrict all communications between the LOB and the appraiser but do ask that all communications concerning needed information and clarification go through the appraisal department so that we can keep track of the status of the assignment and to facilitate the flow of information. We prefer to keep copies of any data shared with the appraiser so we can understand what is going on. However, sometimes direct officer contact is not possible to prevent. If the issue is needed information, we are more lenient,  but if the officer oversteps their role and starts raising value or timing issues, then they likely will be contacted by the job manager. Direct contact has not been a major problem in many years and on the rare occasions it does occur, it’s typically a new officer hire!

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I think it depends on the size of the organization. In our case, we do not have an “appraisal department” so the Lenders do issue the Appraisal Engagement letters, send copies of leases, tax cards, the contact number of the Borrower, etc. While not prohibited, once the appraiser is engaged and the name and contact number of the Borrower is provided, the appraiser usually does not have any more contact with the lender unless there is a need for some type of clarification, until the final report is delivered.  The lenders do not pick the appraiser, we have a process in which they go to a single person that gives the name of the next appraiser on the list, or in limited cases they give a couple of names for an expensive appraisal to make sure the fees charged are fair. In that case a couple of appraisers would be asked to give their bid for cost and delivery date. Without naming the appraiser, the Lender may have a situation in which one has lower price but a longer delivery time frame so the lender would ask the Borrower (without naming the appraiser) which is more important, price or delivery date to determine the appraiser. Once the appraisal is received by the lender, if there are any issues that need to be addressed (after your review) the Lender makes contact with  Appraiser to point out those issues and requests a re-submission/correction, etc.

 So in summary that is what we do, understanding our Bank size does not afford us the luxury of having an appraisal department. I think our process maintains the integrity of keeping the appraisal assignment away from the Lender, but, it would be too cumbersome to keep the exchange of initial information regarding the assignment (leases, tax cards, addresses, surveys, etc.) away from the lender. And, as you know,  we could not just assign such a task to just anyone, so the instructions for the appraiser need to come from someone that has some understanding of appraisals and the subject property.

 Finally, our lenders do not question the appraiser on a final value unless the Review results in a questionable value. And, our lenders do  not discuss “where the value needs to be to make the deal work” or any such discussions during the appraisal process. And, of course we have an approved list of appraisers that we use, divided by residential and commercial designations.

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we do not allow the line of business to communicate with the appraiser. All information from the line runs thru the appraisal group.  If the line is involved in any way having contact with the appraiser the appraiser always shows some allegiance to the line of business blurring the true client in the assignment which is the appraisal group. It so pure allowing no contact.   on occasion when we allowed the line to direct info or other communications directly to the appraiser, the appraiser even copied the line on the completed appraisal and all other communications making our job much harder
 Bottom line if it’s absolutely necessary to involve the line in having contact with the appraiser only due to complex assignments, we will but put in hard stops with the appraiser
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We allow the loan officer to have very limited contact, but they are allowed to discuss factual information about the property and coordinate site visits with the appraiser if they need to see the property and it is too disruptive to have multiple inspections. The appraisers and account officers are cautioned to not discuss anything related to value, whether that be the actual value, investment parameters, rents, etc.

If there is any question as to whether an account officer might cross the line, we require that someone from appraisal be on the call.

We actually have “relationship managers” and “account officers”. The RMs are more salesmen, are closer to the borrower, and have more to gain by trying to influence an appraiser. We try to limit their access to the appraiser to none if possible. There have been a few that consistently try to cross the line (usually only the smaller loans and SBA loans as far as I know). The institutional property group RMs are rarely a problem, although when learning they might make a mistake. They learn quickly though. The account officers are in a different role and are in general much more professional and aware of the consequences. They will generally ask permission first if they want to talk to the appraiser, or will send comments / concerns to me and I filter and pass along to the appraiser.

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We eliminate any loan officer communication with appraiser. Safe full proof approach. Unfortunately I’m heavily involved in all aspects of the appraisal process but necessary due to loan policy. Have a great weekend.

Facilitating Real Estate-Related Transactions Affected by COVID-19

Summary

The Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System (collectively, the agencies) issued an interim final rule (IFR) that allows institutions supervised by the agencies to defer obtaining an appraisal or evaluation for up to 120 days after the closing of certain residential and commercial real estate loans. The agencies, with the National Credit Union Administration and the Consumer Financial Protection Bureau, in consultation with the state financial regulators, also issued an Interagency Statement on Appraisals and Evaluations for Real Estate Related Financial Transactions Affected by the Coronavirus (Statement). The Statement outlines existing flexibilities provided by industry appraisal standards and the agencies’ appraisal regulations and highlights temporary changes to Fannie Mae and Freddie Mac appraisal standards to facilitate real estate transactions.

Statement of Applicability to Institutions under $1 Billion in Total Assets:

This Financial Institution Letter (FIL) applies to all FDIC-supervised institutions.

Suggested Distribution

FDIC-Supervised Banks

Highlights:

The agencies recognize that the National Emergency declared in connection with coronavirus disease 2019 (COVID-19) presents challenges for individuals performing appraisals and evaluations to perform inspections and complete valuation assignments in a timely manner.

  • The IFR:
    • Defers the requirement to obtain an appraisal or evaluation for up to 120 days following the closing of a transaction for certain residential and commercial real estate transactions, excluding transactions for acquisition, development, and construction of real estate
    • States that the agencies are providing this relief to allow regulated institutions to expeditiously extend liquidity to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of COVID-19.
    • Indicates regulated institutions should make best efforts to obtain a credible valuation of real property collateral before the loan closing, and otherwise underwrite loans consistent with the principles in the agencies’ Standards for Safety and Soundness and Real Estate Lending Standards.
    • States that this temporary change to the appraisal rules expires on December 31, 2020.
  • The Statement:
    • Outlines existing flexibilities in the Uniform Standards of Professional Appraisal Practice and the agencies’ appraisal regulations.
    • Advises that there are temporary changes to Fannie Mae and Freddie Mac appraisal standards that can assist lenders during this challenging time.