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#399972 - 08/09/05 09:11 PM use of older appraisal - kosher?
Anonymous
Unregistered

We financed a customer's purchase of CRE five years ago. The property currently has a LTV of 50% using original value - we would expect the market value has significantly appreciated.

Customer is purchasing different CRE, and wants us to take a second on the original property in lieu of down payment (the ratios are more than adequate, even w/o any appreciation).

The appraisal for the original property was addressed to us, no issues there. We would like to obtain a limited scope appraisal on the original property for the new loan.

I can't find any requirement for us to obtain a new appraisal - is that accurate? The loan will represent about 5% of our capital - is there any likelihood that our decision to obtain a limited scope appraisal would be criticized as unsafe?

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Lending Compliance
#399973 - 08/09/05 09:39 PM Re: use of older appraisal - kosher?
HRH Okie Banker Offline
Power Poster
Joined: Jan 2003
Posts: 3,070
Oklahoma
The agencies allow an institution to use an existing appraisal or eval to support a subsequent transaction, if the insitution documents that the exsisting estimate of value remains valid. Therefore, a prudent appraisal and evaluation should include criteria to determine whether an existing appraisal or eval remains valid to support a subsequent transaction. Criteria for determining whether an existing appraisal or eval remains valid will vary depending upon the condition of the property and the marketplace, and the nature of any subsequent transaction. Factor that could cause changes to originally reported values include: passage of time; the volatility of the local market; the availability of financing; the inventory of competing property; improvements to or lack of maintenance of, the subject property or competing surrounding properties; changes in zoning; or environmental contamination. The institution must document the information sources and analyses used to conclude that an existing appraisal or eval remains valid for subsequent transaction. OCC Bulletin OCC#94-55 10-28-94
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#399974 - 08/10/05 01:10 PM Re: use of older appraisal - kosher?
Anonymous
Unregistered

So, it sounds to me like we would be ok to just use a ltd scope appraisal?

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#399975 - 08/10/05 07:43 PM Re: use of older appraisal - kosher?
Anonymous
Unregistered

Is this an unusual situation - is that why I am not getting many opinions?

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#399976 - 08/10/05 08:03 PM Re: use of older appraisal - kosher?
Anonymous
Unregistered

Don't see this as unusual situation. Appears here often.
You got good advice from Okie Banker. Just make sure lender documents, documents, documents. If lender lists the reasons why the values are good one, you should have no problems at exam time

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#399977 - 08/10/05 08:54 PM Re: use of older appraisal - kosher?
Anonymous
Unregistered

I guess my biggest problem from reading the guidance is that "subsequent transaction" is not defined. Based on this paragraph

Quote:

An institution may engage in a subsequent transaction based on documented equity from a valid appraisal or evaluation, if the planned future use of the property is consistent with the use identified in the appraisal or evaluation.




I think that the transaction I described will qualify, but I'm not sure. If this were a refinance, I wouldn't have any question that it was ok.

So, let me rephrase - is this a "subsequent transaction"?

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#399978 - 08/10/05 10:02 PM Re: use of older appraisal - kosher?
HRH Okie Banker Offline
Power Poster
Joined: Jan 2003
Posts: 3,070
Oklahoma
I would deem this is a subsequent transaction.
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#399979 - 08/11/05 12:34 PM Re: use of older appraisal - kosher?
Frodo2 Offline
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Joined: Aug 2004
Posts: 168
Missouri
I don't think this would be a "subsequent transaction". I think you have a "new transaction" involving the subsequent use of the old appraisal. Even though there is no specific definition in the regulation for "subsequent transaction" there are some examples provided in the FDIC's Manual of Examination Policies and they involve in addition to renewals and refinancing, such things as workouts, restructuring, and similar transactions involving addition or substitution of borrowers to the original loan. It looks like in this case you're just granting a new loan which would require a new appraisal if the one you have on the old loan is no longer current.
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#399980 - 08/11/05 01:15 PM Re: use of older appraisal - kosher?
Anonymous
Unregistered

Frodo, if we did it as a cash out refi on the original, and then did a separate loan for the new property, that would not require a new appraisal, in your opinion, correct? To me, there is no functional difference in the two transactions. I did pick up on this from the guidance yesterday:

Quote:

An institution may engage in a subsequent transaction based on documented equity from a valid appraisal or evaluation, if the planned future use of the property is consistent with the use identified in the appraisal or evaluation.




I have an e-mail in to our examiners, I'll let you know if I hear anything back from them.

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#399981 - 08/11/05 02:21 PM Re: use of older appraisal - kosher?
HRH Okie Banker Offline
Power Poster
Joined: Jan 2003
Posts: 3,070
Oklahoma
Also - As another way to save your customer money is the following exemption:

Is this a business loan of $1 million or less and repayment of the loan does not depend on the sale of real estate or rental income from real estate for repayment?

(Business loan means a loan or an extension of credit to any corporation, general or limited parthership, business trust, joint venture, pool, synidcate, sole proprietorship, or other business entity.)

In that case an evaluation is required but if you can document as to the "useful" life of the existing appraisal, I think it would be acceptable. Document, document, document the "useful" life of the existing appraisal.
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#399982 - 08/11/05 02:26 PM Re: use of older appraisal - kosher?
Anonymous
Unregistered

No, the new loan is over $1MM. Also, it depends on rental inc for repayment.

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#399983 - 08/13/05 07:30 PM Re: use of older appraisal - kosher?
Frodo2 Offline
100 Club
Joined: Aug 2004
Posts: 168
Missouri
I would be interested in seeing what your examiner has to say about it but at this point I'm still not sure what the answer is. The whole issue seems to be subject to interpretation.

Without knowing all the details of this particular transaction I wouldn't want to say if there is no functional difference or not in doing a cash out refi vs taking a 2nd on the existing property to secure the new loan. On the surface it doesn't look like there would be any functional difference but if there is no functional difference I would tend to structure it the way that most clearly complies with the guidelines if there is still some doubt. It is clear that the appraisal guidelines specifically allow an "evaluation" in lieu of an appraisal in the case of a refinance. It's just not clear about what other "subsequent transaction" means. I did find the following in the FDIC FIL-20-2005 FAQ dated 3-22-05 but I'm still not clear if this is a "subsequent transaction" or not (it's like trying to determine what the meaning of "is" is ):

23. Do the interagency guidelines apply only to loans in excess of $250,000? Is the $250,000 threshold the loan amount or the property value?

Answer: The interagency guidelines apply to all real-estate-related financial transactions regardless of size or whether loans are for a regulated institution's own portfolio, held for sale, or held in asset-backed conduits. However, the agencies' appraisal regulations allow regulated institutions to use an appropriate evaluation of the real estate in lieu of an appraisal for transactions with a value of $250,000 or less, business loans $1 million or less, or subsequent transactions (transactions involving an existing extension of credit at the lending institution). The regulations define transaction value as the amount of the loan or extension of credit, not the value of the property. The interagency guidelines contain minimum standards for evaluation content and address the qualifications of individuals performing evaluations.
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#399984 - 08/15/05 01:21 PM Re: use of older appraisal - kosher?
Anonymous
Unregistered

I talked with the appraisal expert at the ABA about our situation (still no word from examiners). His thought was that this loan would qualify as a "subsequent transaction" - but, he was nervous about the age of the appraisal. Of course, he said that the age was not necessarily the most important factor, if we could document very good reasons why we beleived the old appraisal was still valid.

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#399985 - 08/16/05 02:28 AM Re: use of older appraisal - kosher?
Anonymous
Unregistered

I might be able to shed some light, since I worked for a large bank for a long time and am also a commercial appraiser (now free at last with my own company).

SR 94-55 is the right place to be, and the definition for subsequent transaction can be gleaned from the text...it is a renewal, modification, or extension of an existing credit. A subsequent transaction has an evaluation requirement, and an existing appraisal can be used to fulfill that requirement as long as the transaction meets the conditions stated in the "Renewals, Refinancings and Other Subsequent Transactions" which usually means no new money....BUT, if you have documented equity (that is, you have the original appraisal value, and you have a loan against that appraisal so you can do the equity math) you can lend that equity as long as the use isn't changing. Of course the other stuff still counts...no deterioration in the property or the market in which it is located, etc.

As for limited scope, it is up to the entity engaging the appraisal to decide whether limiting the scope is appropriate (and the engaged appraiser has to agree), and both parties have to stay in sync with USPAP 2f "An appraiser must not allow assignment conditions or other factors to limit the extent of research or analysis to such a degree that the resulting opinions and conclusions developed in an assignment are not credible in the context of the intended use of the appraisal." In questioning whether a limited scope appraisal/evaluation is appropriate, is your goal to narrow the assignment so you can save some money? If you did, in fact, need a new appraisal (and I don't think you do based on the info you've provided and 94-55), a limited scope might work. Depends on the property type/use. For instance, if it is a shopping center or apartment complex and it isn't brand new, you could ask the appraiser to limit it to an income approach. Where you might really save some money is in the reporting format (self-contained vs. summary vs. restricted). You're going to see the most savings with restricted, but that is the format that is "for your eyes only" so the customer needs to understand that they are not going to be able to see a copy of the appraisal. It is essential to remember that, in engaging a limited scope appraisal, it is the financial institution's responsibility to define the limit of the scope, so you have to tell the appraisal what approaches to develop. At the bank where I worked, we used this language "A limited scope appraisal is requested. The appraiser will, at a minimum, develop the [one or two specified approach/es].

Hope this helps. Sorry it took me so many words to add my 2 cents.

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#399986 - 08/16/05 02:29 AM Re: use of older appraisal - kosher?
Appraiser Lady Offline
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Joined: Jun 2005
Posts: 198
PA
sorry...that anon posting was me...I forgot to log in.

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#399987 - 08/16/05 01:40 PM Re: use of older appraisal - kosher?
Anonymous
Unregistered

Thanks appraiser lady. Just to clarify, we are not trying to meet the requirement for a new appraisal with a limited scope appraisal, we are trying to document that it is still reasonable to rely upon the previous appraisal by obtaining a limited scope appraisal.

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#399988 - 08/17/05 02:19 AM Re: use of older appraisal - kosher?
Appraiser Lady Offline
100 Club
Joined: Jun 2005
Posts: 198
PA
Then limited scope would work for that purpose, as long as you didn't limit it to the point that it would result in erroneous results. But there's no need to spend the money since you can gather the documentation needed from other sources...pics to prove that the property hasn't deteriorated, assessment cards to show relationships between the old appraisal and the assessment at that time and the assessment now (use steb rates to support). If it's an income property, Income and Expense Reports and cap rate indexes would work....yada yada

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#399989 - 08/17/05 09:51 PM Re: use of older appraisal - kosher?
Anonymous
Unregistered

Quote:

SR 94-55 is the right place to be, and the definition for subsequent transaction can be gleaned from the text...it is a renewal, modification, or extension of an existing credit.




I'm beginning to think maybe I just didn't understand the original post. I thought we were talking about a "new" loan of more than $1 million to be secured by a "new" property being purchased (presumably with a 1st DT being taken on the "new" property (supported by a current appraisal)and with a second DT being taken on an existing property (purchased 5 years ago) in lieu of the downpayment on the "new" property.

If we're talking only about advancing additional funds on the existing loan in order to fund the purchase of a new property and taking a 2nd DT on the property appraised 5 years ago as the collateral then I would agree that it is a "subsequent transaction" and only an "evaluation" of the appraisal done 5 years ago would be necessary since there is no new note and we are only modifying the existing loan by increasing the loan amount and adding a 2nd DT.

If however, there is a "new note" involved then I don't see how it is a "renewal, modification, or extension of an existing credit." Maybe I'm just confused about how the transaction is being structured and Anon can clear that up for me.

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#399990 - 08/17/05 09:57 PM Re: use of older appraisal - kosher?
Anonymous
Unregistered

lll

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#399991 - 08/17/05 10:09 PM Re: use of older appraisal - kosher?
Frodo2 Offline
100 Club
Joined: Aug 2004
Posts: 168
Missouri
The last couple of posts were mine. I just forgot to log in and don't know how to edit them in Anon status.
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Not a legal opinion, just my personal opinion.

"A nickel isn't worth a dime today."- Yogi Berra

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#399992 - 08/18/05 03:04 PM Re: use of older appraisal - kosher?
Anonymous
Unregistered

Frodo, your understanding of the transaction is correct - it is a new note secured by a first on a new property and a second on an existing property.

However, you are the first person I have talked to that is of the opinion that this is not a subsequent transaction as it relates to the original property. Others have expressed concern about the age of the original appraisal, but not the nature of the transaction.

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#399993 - 08/18/05 07:02 PM Re: use of older appraisal - kosher?
Frodo2 Offline
100 Club
Joined: Aug 2004
Posts: 168
Missouri
I know and being out there on a limb by myself on it is not a comfortable place to be on this board, but it just seems to me to be a part of the Interagency Guidelines that is subject to interpretation since "subsequent transaction" is not specifically defined. I think the definition has to be as "appraiser lady" put it "gleaned" from the guidelines. One can make a liberal interpetation or a conservative one based on how it is read. I just don't know what interpretation your particular examiner or mine might have so I tend to take the more conservative path.
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Not a legal opinion, just my personal opinion.

"A nickel isn't worth a dime today."- Yogi Berra

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#399994 - 08/19/05 02:26 AM Re: use of older appraisal - kosher?
Appraiser Lady Offline
100 Club
Joined: Jun 2005
Posts: 198
PA
You have company on your limb Frodo.

My prior comments were made with the thought that the borrower wants to pull the equity from the original mortgage to use as equity on the second mortgage. I conveniently ignored anything about the appraisal requirements w/r/t the new property's financing. Because it is a CRE loan >$250,000 relying on income from the property for repayment of debt, there is a definite appraisal requirement for the new property, and an evaluation requirement for the older mortgage.

You still might be able to get away with a limited scope on the new appraisal, especially if it is clearly an income property. Might want to instruct the appraiser to, at minimum, develop the income approach. Might be able to reasonably eliminate development of Cost Approach depending on development density in the market (i.e. availability of land sales) and age/history of improvements to the property. The estimation of accrued physical depreciation, subjective at best, is weakened as the economic life of the property decreases and when renovations or additions have been made, reliability on an estimate of depreciation is further reduced.

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