Tag Archives: Banks

Reviewer Thoughts & Tips

APPRAISER SELECTION PROCESS

NOVEMBER 26, 2023 – I received the following question from a staff appraiser with a bank. My answer follows his email.
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I am looking for direction/clarification on the regulations that discuss how an appraiser should be selected (specifically for commercial FRT’s). I work in the appraisal department of a bank and I need to prepare some internal policies/procedures/discussions on selecting an appraiser to engage. Many lenders feel they should be provided three choices and allow them or their customers to select the appraiser based on the lowest fee or the quickest turn time for the appraisal. They think that all that should be done is to not disclose the appraiser names and everything will be okay. However, my interpretation is that the appraiser should be selected based on their experience with the property type and the location in which the property is located. The regulations never appear to be direct enough, or all in one document to show how allowing lenders or borrower to participate in the selection would be viewed by bank examiners and regulatory agencies.
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We start with the following requirement from the 2010 Interagency Appraisal and Evaluation Guidelines (IAEG):

An institution’s selection process should ensure that a qualified, competent and
independent person is selected to perform a valuation assignment. An institution should
maintain documentation to demonstrate that the appraiser or person performing an evaluation is competent, independent, and has the relevant experience and knowledge for the market, location, and type of real property being valued. Further, the person who selects or oversees the selection of appraisers or persons providing evaluation services should be independent from the loan production area.

The other pertinent quote follows:

Moreover, the Guidelines stress that an institution should not select a valuation method or tool solely because it provides the highest value, the lowest cost, or the fastest response or
turnaround time.

Besides independence, the next most important item is to select an appraiser (or evaluator) that is competent in regard to the property type and subject market. That much is a given. There is no gray area.

So, the question becomes how can we BOTH select a competent appraiser AND allow the loan officer (and usually the borrower) to select from among several fee quotes?

Financial institutions accomplish this by bidding assignments to a group of competent appraisers. For example, the subject is a basic 5,000 SF, owner-occupied warehouse in a city of 100,000 people. It is likely the financial institution has 3 or 5 or more appraisers on their approved list that are competent to appraise this property in this market. So, we send out an RFP to three appraisers. All are equally competent to perform this assignment. We get the following bids:

Appraiser A – $2,500 / 3 Weeks

Appraiser B – $3,000 / 2 Weeks

Appraiser C – $2,000 / 4 Weeks

Over the past 3 decades, 95%+ of the banks and credit unions I have worked with forward the quotes exactly as shown above to the loan officer. The key is to not disclose the appraiser names. Borrowers and loan officers cannot suggest appraisers to use or not use. But, examiners and regulators are ok with them choosing from the anonymous quotes shown above.

Have we met the requirement of engaging a competent appraiser? Yes.

Have we helped the loan officer (and borrower) have enough information to make a time and price decision? Yes.

Are the examiners and regulators ok with this process? In my 30+ years of being involved in the appraisal process with financial institutions, I have not heard of a single objection.

There are two keys to making this acceptable:

  1. You can show that you only bid the assignment to competent appraisers; and,
  2. You do not disclose the appraiser names when sharing the bid information with the loan officer.

Maybe you are asking what the other 5% of financial institutions do. It may be less than that actually. This small group includes how I did things when I was Chief Appraiser. The appraisal department selected the best bid to go with. When requesting an appraisal to be ordered, the loan officer would let us know if time or cost was more important. This method speeds up the process and also allows us to spread the work around to the approved appraisers. The appraisal time is delayed when the loan officer/borrower make the selection. I have seen delays of weeks or longer. Also, through the blind selection process one appraiser may get too many assignments at once. Some appraisers have a habit of always bidding low and quick, even when swamped with work and knowing they cannot meet their deadlines.

As usual, feel free to send me follow-up questions. Or suggestions to add to this post or clarify something I said. My email is GeorgeRMann@Aol.Com.

The Mann


Mann Overboard

THE REMAINDER OF 2023 – BANKS & HOUSING

JULY 30, 2023 – This is my 3rd and last post regarding my forecasts for the remainder of 2023. Today’s topics are banks and housing.
BANKS – I have been saying since the SVB/SBNY closings that week after week goes by without any closures. Finally(!), last week we had a bank in Kansas get closed down by the FDIC. Also, PacWest was acquired. At this point, we remain closer to my forecast of 0-10 closures than the 176-200 closures forecast by many people.
As for CRE loan defaults, I have dealt with an office building (100% leased – it appears the borrower went bankrupt for some other reason) and two churches (same loan). We shall see if this picks up.
The Regional Bank Index (KRE) continues to soar and is about 20% above the low set the Monday after the SVB/SBNY closings. It is a full 40%+ (!) above its most recent low. Please let all of them people that told you that banks were going down the tubes what you think of their opinions! They have cost the masses a 20%-40%+ return – in less than 4 months at that!!!
As an aside, the market is saying that it does not believe there will be a CRE loan debacle for banks. Either not many CRE loans will default and/or banks are well prepared and capitalized to handle the defaults.
HOUSING – Let me just present a bunch of stats that clearly shows the strength of the housing market. New home sales increased 28.4% from July 2022 to June 2023. According to the Case-Shiller Index, home prices are within 1% of their June 2022 peak. Redfin reports home prices are up 2.1% from a year ago. The American Enterprise Institute’s (AEI) Home Price Appreciation (HPA) Index was up 0.7% month-over-month in June. It has been up every month this year. Annual appreciation is at 2.9% and projected to increase to 6%-7% by yearend. The Homebuilders Stock Index is up an incredible 60% (!)from last year’s lows. Those who forecast a crash in the housing market continue to be way off the mark.
SUMMARY – With both bank and housing stocks at their highs, the markets are saying both industries will do very well through year end and into early next year. There is no sign yet of a slowdown occurring for either industry. Sadly, all of those economists, market forecasters, and pundits have kept the public from making 20%-60%+ returns in these industries. But, that has been the norm since the world’s largest casino came into existence.
To sum up up the 3 posts:
Inflation will be stubborn and rise slightly over the remainder of the year – probably stay in the 3.5%-4.0% range.
The economy has a near zero chance of going into a recession. Yes, GDP will slow down from the amazing 2.2% rate that occurred in the first half of the year. I will put this hidden little sentence out there to refer back to in 12-18 months – The chance of a recession occurring looks to be 4th Quarter 2024 into 2025. I suspect that a year from now the broken-clock recession mongers will have given up and admitted the economy is strong, et al. Just in time to be wrong again:)
And, per above, banks and housing should be rock solid into the 1st Quarter of 2024.
I will provide updates per usual. But, will revisit the 6-month forecasts (for 1st and 2nd Quarter 2024) around the Holidays. Yes folks, less than 5 months til Christmas:)
Shalom,
The Mann

Mann Overboard

INFLATION FORECAST, BANKS & HOUSING

MAY 11, 2023 – As forecast, inflation didn’t change much last month. But, did fall below 5.0%. Significant declines will occur over the next two months.
The 3-month annualized inflation rate is high at 5.7%. The 6-month annualized inflation rate is 3.6%. These figures bracket the annualized rate (4.9%) and thus indicate the decline in the annual CPI should slow down after the next two months are in.
Based on the data, my prediction for next month’s figure is 4.1%-4.3%. I like the data and am confident the next reading will be in that range.
As for the July 12th forecast, the data now suggests a figure around 3.2%-3.4%. The odds for a figure around 2% are about nil, unless we have full blown deflation show up. Doubtful, but there are signs we may get surprise negative readings in the coming months. I will need to see it to believe it. After bottoming with the July 12th figure, it looks like inflation will rebound in the second half of the year to the 5%-6% range. That said, we will be far below the double-digit rates many people have been forecasting for the past year. However, this will make the Fed consider more rate increases. Something, the market is not pricing in at this time.
A bit of trivia. The annual CPI rate has decreased for 10 straight months. I am certain that streak will extend to 12 months. The only times such a streak occurred was in 1921 and 2012. Neither were around a recession or stock market crash.
BANKS – Regarding banks, week after week goes by without any closures. At this point, we are much closer to my forecast of 0-10 closures than the 176-200 closures forecast by many people. Pac West seems to be the bank on the hot seat right now. It is one of the ten banks I listed a few months ago.
The Regional Bank Index (KRE) broke down last week and is about 10%-15% below the low set the Monday after the SVB/SBNY closings. This is saying the market expects to see CRE loan losses (I am going to post about this soon) increase the remainder of the year. No surprise in that forecast.
HOUSING – The American Enterprise Institute’s (AEI) Home Price Appreciation (HPA) Index was up 1.4% month-over-month in March. I believe it has been up every month this year. NAR reported that home prices increased in 70% of metro areas in the First Quarter of 2023. The Homebuilders Stock Index is up a full 40% from last year’s lows. Those who forecast a crash in the housing market appear to be way off. As I forecast about a year ago, the housing market would slow way down and possibly go slightly negative (that has occurred in the hottest markets). A year later I am seeing a slightly improving market ahead.
Til next month.
Shalom,
The Mann

Mann Overboard

GDP & BANKS UPDATE

APRIL 29, 2023 – 1st Quarter came in at +1.1%. It continues to slow. But, another positive quarter. Early forecasts show 2nd Quarter GDP being slightly positive. However, with ample time for adjustments, there is a chance it could end up being negative.
Quick note, I received an email from the Fed last week showing it was expecting 1st Quarter GDP to be +1.13%. They appear to be the only one to get the forecast right. Of course, they have access to all of the data that goes into the GDP.
Regardless, it will be around Halloween before a recession can be in the books. And if the 2nd Quarter GDP does end up being positive, a recession cannot be official until late January 2024.
So far, the stock market says a recession will not occur this year. We shall see who is right – the stock market and the smart money or everyone else that is all but guaranteeing a recession will occur in 2023.
Will the Leading Economic Indicator that has declined for 10+ months and has been signaling a recession for many months be right?
Will the fact that bank credit tightening leads to a recession be right?
There are numerous other indicators signaling a recession will occur this year. The only problem they have is they are not the stock market.
My bet is, and always has been, on the stock market being correct. As always, we shall see.
BANKS – Still no new bank failures. First Republic Bank was part of this original crisis that occurred with the SVB and SNBY and Credit Suisse failures. The only other bank that is walking on thin ice is Deutsche Bank. Beyond this initial list, no banks have failed. The count remains 0 versus the 176-200 predicted by many people. (UPDATE – In 1907, JP Morgan the person came to the rescue of the banking system and in 2023 the company with his name did the same.))
The Regional Bank Index remains about 2% above the low set during the SVB/SBNY crisis with the drawdown to date being 3%. Money is not being made on these stocks. But, they sure have not fallen apart. Friday was a classic day that fools the public. The headline news was First Republic Bank heading towards failure. Instead of being down, both the Regional Bank Index and the Dow were up. The Dow is now above 34,000 again. Remember, a Bull Market climbs a wall of worry. The more negative news we have this year, the higher stocks should go. And it looks like all we will hear from the pundits is negative news. When the news turns positive, the stock market will have already topped.
Happy trading and investing.
Shalom,
The Mann

Mann Overboard

INFLATION FORECAST AND BANK UPDATE

APRIL 14, 2023 – As I said a month ago, I thought the data was forecasting a higher rate than we would see. Sure enough, annual inflation fell significantly to 5.0%. Just under my forecast of 5.1%-5.3%.
The 3-month annualized inflation rate is a very high 6.9%. The 6-month annualized inflation rate is 3.4%. These figures bracket the annualized rate (5.0%) and thus indicate the decline in the annual CPI should slow down.
Based on the data, my prediction for next month’s figure is 5.0%-5.1%. My gut tells me this will be the ceiling with a rate as low as 4.6% possible.
The June and July readings will reflect significant declines in the annual CPI. As for the July 12th forecast, the data now suggests a ceiling around 3%. The odds for a figure around 2% have become very small. It is looking like we might have 3%-4% inflation for the second half of the year. It will take a recession combined with deflation to achieve the Fed’s goal of sub-2% inflation. That said, 3%-4% is far below the double-digit rates many people have been forecasting for the past year.
Regarding banks, week after week goes by without any closures. At this point, we are much closer to my forecast of 0-10 closures than the 176-200 closures forecast by many people. CRE loan losses are on their way. But, I just don’t see many banks failing because of such. Simply due to increased capital from 15 years ago and the Fed shoring up their unrealized treasury bond losses.

The Regional Bank Index (KRE) remains about 3%-5% above the low set the Monday after the SVB/SBNY closings. The maximum drawdown since then was about 1.5%. Not much movement in general. But, the market certainly hasn’t thrown in the towel on these banks.
Lastly, the market is telling the Fed to raise rates another 25bp and then later this year lower them twice.
Shalom,
The Mann