Tag Archives: IAEG

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.
=================================
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.
=================================

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


Reviewer Thoughts & Tips

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

 

Reviewer Thoughts & Tips

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.”
Reviewer Thoughts & Tips

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

Reviewer Thoughts & Tips

FRTs – Federally Related Transactions

February 25, 2020 – Most of us know which loans are classified as FRTs.  The loans that have caused confusion are those that are under the various threshold levels.  Are those FRTs or non-FRTs?  So, here is a short explanation that will hopefully be of assistance.

We start out with everything being a FRT.

Then we see if any of the 12 or 13 exemptions apply.  Here we fork in two directions.

1.  For the 9 exemptions where neither an appraisal nor an evaluation are needed (e.g. Abundance of Caution, Unsecured loans, loans sold to FNMA/Freddie et al), those transactions are outside of FIRREA entirely and thus are not FRTs.

2.  For the 3 or 4 exemptions that do not require an appraisal, but require an evaluation, these loans also are NOT FRTs.  However, federal regulations still apply as they cover what is needed in the evaluation realm.

The federal regulators only care about evaluations being done by a competent person and providing safety and soundness to banks/CUs.  The December 2010 IAEG is NOT law and, thus, although it addresses who can perform evaluations, the content of evaluations, et al, none of that matters to the bank examiners.  The only requirements in the law itself is that someone competent perform these (can be a licensed appraiser or not a licensed appraiser) and the resulting report provides what is needed for safety and soundness to be met.

So, it is left to the courts to decide debates on whether states can require that only licensed appraisers can perform evaluations.  Although federal regulators believe states have this right, they recognize that the preemption argument can be made and judges might see it that way.
It obviously would be nice if things were not left to various judges to give different rulings.  However, that is not the situation we have to live with.
The Mann 
Mann Overboard, Reviewer Thoughts & Tips

NEW INTERAGENCY GUIDANCE ISSUED

October 16, 2018 – The Federal Agencies have issued an updated guidance titled ‘Frequently Asked Questions on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines.’  This rescinds a similar document issued in 2005.

You can download this 14-page document at the following URL:

https://www.fdic.gov/news/news/financial/2018/fil18062a.pdf

Please pass this document along to your in-house appraisal staff and other bankers.

Reportedly, there are no significant changes.  Simply, an update of a 13-year old document with some needed clarification.

Reviewer Thoughts & Tips

THE ‘ERROR’ IN THE 2010 INTERAGENCY APPRAISAL GUIDELINES

July 30, 2018 – The following wording from the December 2010 IAEG suggests that property value be used to determine if an appraisal or evaluation is needed.  Obviously, this is not possible since property value is not known at the time a decision is made.

The text appears next followed by a reply from G. Kevin Lawton with the OCC.  Mr. Lawton was kind enough to provide the response and allow it to be credited to him.

Text from Item 1 in Appendix A:

1. Appraisal Threshold
For transactions with a transaction value equal to or less than $250,000, the Agencies’ appraisal regulations, at a minimum, require an evaluation consistent with safe and sound banking practices.54 If an institution enters into a transaction that is secured by several individual properties that are not part of a tract development, the estimate of value of each individual property should determine whether an appraisal or evaluation would be required for that property. For example, an institution makes a loan secured by seven commercial properties in different markets with two properties valued in excess of the appraisal threshold and five properties valued less than the appraisal threshold. An institution would need to obtain an appraisal on the two properties valued in excess of the appraisal threshold and evaluations on the five properties below the appraisal threshold, even though the aggregate loan commitment exceeds the appraisal threshold.

Mr. Lawton’s response:

This is one of those areas in the Guidelines where the wording, which mixes the concept of “value” and “transaction value,” can create a problem that is confusing and not consistent with the regulation, and I have had banks and examiners complain about the inconsistency.

The solution is to have banks allocate “transaction value” among the individual properties rather than “property value.”  The bank should allocate the entire aggregate commitment among properties.  Doing this allocation of “transaction value” rather than expected “property value,” sticks to the spirit of the regulation itself.  There is another, bigger advantage of using transaction value as the driver: it avoids the Catch‐22 problem that some banks have brought up: “what if I allocate property value to one property of $200,000, obtain an evaluation, and the evaluation result shows a market value (property value) of $260,000, do I then need to go get an appraisal?”  In other words, “I estimated the property value to be $200,000 and I was wrong. The property value is $260,000 and since, using the “property value” as the driver for what is needed, I now need an appraisal because the property value is above the threshold. This, in itself, is an area where the Guidelines are not consistent with the regulation, since the Guidelines talk about property values “less than the appraisal threshold” (Appendix A, Section 1). That sentence, and the following sentence in the Guidelines mix the concept of “property value” and “transaction value” (last two sentences in Section 1).

The “appraisal threshold” deals with transaction value, not property value.  So, back to the example above, if the banker estimates (allocates) $200,000 of the transaction value to the property (rather than “guessing” a $200,000 property value) then an evaluation is allowable and if the evaluation result shows a property value of $260,000 there is no Catch‐22.  It does not matter what the property value result is because property value does not drive what is needed.  So when a bank addresses “property value” as the driver of what product (appraisal or evaluation) is the minimum product required under the regulation they may need an evaluation (based on a guess of property value of $200,000) followed by an appraisal (because the evaluation shows a property value of $260,000). This is not what the Guidelines intended.

One could probably argue this several ways, but the “allocation of transaction value” among the individual properties, accomplishes the following:  1) it is consistent with the intent of the regulation, 2) doesn’t jumble the concepts of property value and transaction value, 3) avoids the “what if’s” when property value is the driver, 4) is understandable, and, 5) is a practical solution for our bankers.

Hope this provides some clarity to this issue.

The Mann

Mann Overboard, Reviewer Thoughts & Tips

CORRECTING THE APPRAISAL FOUNDATION’S FAKE NEWS

May 18, 2017 – Today The Appraisal Foundation (TAF) gave a webinar on using Restricted Appraisal Reports (RARs) to meet the need of Evaluations.  As TAF is no longer an unbiased entity, I will correct the Fake News they put out today.  My perspective is based on 23+ years of writing true Evaluations (i.e. non-USPAP) and 23 years of ordering RARs.  I have seen both type of reports all across the nation.  So, here goes…

  1.  FAKE NEWS – Evaluation requirements are more than Appraisal requirements.  Misleading.  TAF listed the 5 appraisal requirements listed in FIRREA.  Then compared that to the 14 bullet points for Evaluations listed in the IAEG.  Of course, one of the 5 appraisal requirements is mandatory compliance with USPAP – which has 12 bullet points in SR 2-2.  A few of those requirements require multiple items.  FACT – As I will explain below, A RESTRICTED APPRAISAL REPORT MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

2.  Remember USPAP has NOTHING to do with Evaluations.  Only the December 2010 IAEG applies to Evaluations.  Thus, this webinar and the next webinar about writing an USPAP Evaluation (an oxymoron – USPAP has an A for Appraisal in it, not an E for Evaluation! Evaluation requirements are in the IAEG) are not relevant.

3.  IMPORTANT EXPLANATION FROM GEORGE MANN:

A.  Evaluations CAN omit many items that are required and/or reported in the typical appraisal report (I will list many below).

B.  RARs CANNOT omit any items required by the IAEG for Evaluations.

C.  Therefore, RARs MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

4.  FAKE NEWS – It was insinuated in the webinar that a RAR could have less content than an Evaluation.  A single statement near the end said RARs do need to be beefed up and that will be explained in the next webinar.  That should have been emphasized more.  The sample RAR presented would NOT meet Evaluation requirements.  The IAEG says ‘sufficient information’ is needed.  Simply stating a value is not sufficient information.

5.  Here is a list of items that are typically included in a RAR, but are NOT included in an Evaluation:

2 very important items are Evaluations do NOT require the SR 2-3 Certification, nor do you have a work file requirement.  Those are yuge and bigly!

Reporting-wise Evaluations typically will NOT contain an executive summary, limiting conditions, extraordinary assumptions and hypothetical conditions, intended use, intended user, zoning, tax assessment info, flood zone, detailed property descriptions, prominent use restriction statement (RARs), or listing and sales history.  That is not to say every RAR needs all of those items (many are mandatory though) nor that every Evaluation will omit all of those items (most of them will be omitted though).  Therefore, it is FAKE NEWS for anyone to ever say or insinuate that a RAR contains less or equal detail to an Evaluation.

Remember, Mann’s Law of Evaluations – A RESTRICTED APPRAISAL REPORT MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

Lastly, not that TAF suggested a bank would use an Evaluation on a $34 Million property, the IAEG makes it clear that as the loan and/or property become more complex, banks need to move towards appraisals.  Nearly all Evaluations will be on properties valued around $1 Million or less.  Some exceptions will exist, especially for the largest banks.  But, not too often will a bank use an Evaluation on properties over $1 Million.  Yes, technically, they make their decision based on loan amount.  But, us appraisers deal with property value.

TAF made a great point that an RAR can be done on any size property.  The amount of work doesn’t change between a RAR and an Appraisal Report.  But, the amount of reporting is less (in a RAR) and that saves a little bit of writing time.