In the Real Estate lending guidelines, for loans to purchase an existing property, 'value' means the lesser of the actual acquisition cost or the estimate of market value.

An older OCC guidance definition for calculating the LTV ratio stated 'the LTV ratio is calculated by dividing the total loan amount at origination by the market value of the property securing the credit'.

The definition of market value describes a sale under no stress or influence.

We have a deal where a customer is buying a property in receivership. As this is a distressed sale, the acquisition cost is less than the appraised value and the lender would like to use the appraised value to calculate the original LTV. I don't think that this is correct, but there is this 1998 OCC guidance that mentions 'market value' and not just 'value', which is making me think twice.

Does anyone have any opinion on whether there are any exceptions to the 'lesser of actual acquisition cost or market' rule?

We are an OCC bank and had a similar situation a couple of years ago. Our EIC (Central Region) indicated there is no exception or exclusion for the stressed value of the property.

So if it's a $100M property that your buyer is purchasing for $20M, your LTV calculation relies on a $20M value. No fun, but hopefully you have room in your SLTV calculation to make the loan if it's a good customer.

About six months down the road, you would be able to rewrite the loan into a conforming position on paper as well as in reality.

I would echo that "No exceptions" from all my disussions with our loan review team (made up of ex-OCC examiners).

Plus you are citing guidance that is 17 years old and much guidance has flowed under that bridge since then.

Thanks guys, that's what I thought. I appreciate the feedback. The Lender won't be happy with me, but what else is new?

Too bad this internet thing finds old guidance, it just confuses me.