We have an oreo that we want to sell. I will use hypothetical numbers.

It is on our books for $3000. The appraised value of the oreo is $5000. We have a customer that is willing to pay $7000 but needs us to lend him the money.


Can we lend more on a property (personal residence) to an individual than what the appraised value says it is worth?

The customer is actually going to be paying 31% more than the value of the property. Are there any regulations that would prohibit us from lending money on a residence that the loan is 31% greater than the appraised value?

Managment stated they would not be considering doing this type of loan exception (loan greater than value) if was not our OREO.

Thanks for your help

There is an issue in this case. I believe there is a requirement that you finance less than a certain percentage LTV, (70% or so) in order to fully clear the oreo from your books. I don't know that it is something you are actually prohibited from doing, but it will certainly affect the way you have to account for it. I will check back into this post later, and hopefully there will some specific detailed replies.

From the OCC OREO Handbook:

In addition, other real estate owned includes real estate sold by a national bank
after the effective date of the revised 12 CFR 7.3025 in a “covered transaction”
for the period the transaction remains covered. A covered transaction is defined
as a sale of other real estate owned when:
· Less than 10 percent of total sales price is in cash; or
· There is financing by the bank of all or a portion of the sales price on terms
more favorable than those customarily required by the bank when it is
involved only as lender; or
· The transaction does not transfer from the bank to the buyer the usual risks
and all or most of the rewards of ownership.
A transaction ceases to be covered when those conditions no longer exist. A
buyer can meet the 10 percent cash down payment requirement through use of
private mortgage insurance or an equivalent guarantee and cash.

Thank you both for your responses.

The info you supplied is from the OCC. This may sound stupid but since we are now a state bank, I don't think we would necessarily follow the same criteria as a national bank, would we? I know we all abide by the same regulations but if something is particular to a certain agency, then is it applicable to other types of banks?

According to the OCC guidance, it appears this would not be permitted. Is this coming from a regulation?

Thanks so much

FDIC Discussion

Guidelines for the minimum down payment are set forth in Appendix A to FAS 66. They range from five to 25 percent of the property sales price and are based upon the type and characteristics of the property.

Dan

Thanks so much for giving me direction.

If we do this transaction, we will obtain a 10% down payment so I believe we are covered by the FDIC requirement.

My concern is more about us lending more money than the appraised value (approximately 31% greater)on the personal property. Is this permitted by the regulations?

I know it may be a good business decision to sell an OREO for more than it is valued for but what about lending more money than the value of something.

And what about lending a person more money on their home than what it is appraised for.

I don't feel comfortable with this but I don't have any solid reason to oppose it if I can't locate a regulation requirement. Maybe I am thinking wrong about being opposed to it. Am I?

You will have LTV exceptions to track, you may also want to check state law, being a state chartered bank you may be required to have PMI or some other mitigating insurance for loans in excess of X% LTV. My concern, and I didn't go to read 66, is that you are giving more favorable terms than you would anyone else.

Why is this person willing to pay more than appraised value? Were other potential buyers bidding, driving up the value?

And what happens if this new borrower goes belly-up, won't you be adding insult to injury? Won't you have even more money out there on an REO? What am I missing?

Kaybee

There was no bidding. This person is already living in the house & had a contract with the individual that owed us (became an OREO). The person living in the home is willing to pay the remaining contract (which is greater than the OREO amount & appraised value) amount to own the home but they need to finance it.

In order to get the home out of OREO, we need to finance it. Problem is the remaining contract amount is greater than the appraised value.

We (bank) have two choices, actually three.
Proceed with auction, inwhich the person living there may not get it.
Be kind & lower the selling cost to the person living there which would cover the OREO price.
Be business-minded & sell it to the person living there for the remaining price of the contract to make a good profit.

Mgt is leaning toward the third choice but need to see if any regulations prevent it.

Thanks

I am mentally toying with the "value", that is why I am asking these questions.
Is an appraisal required at all for this property...what is the value?

Did you not write the value down on your books when you took the property into OREO? You no longer have a loan if you have an OREO property. You have a charged off loan and now own real estate instead. Any sale over the book value of the real estate asset, $3,000 - which means that is what the bank feels it is worth to the bank in a sale - will be a gain on sale.

One other question, does Alabama have any predatory lending law that would be triggered by a high ltv residential mortgage loan? All I know about Alabama is that my sister lives there and you have nice beaches.

You need to consult your external accountants on this transaction. There are a number of factors that have to be considered. I believe that the buyer will have to come up with a down payment of the greater of 25% or any amount over 115% of current appraised value, but it has been a while since I looked at this. There may be other accounting factors that impact this besides the OREO rules. I don't have a citation, but it find it hard to believe that you could recognize the full gain at the time of the sale when you are financing the sale for an amount that exceeds current market value. Sounds very similar to what Enron was doing

I don't feel they should lend more than the appraised value, but I also don't think the folks involved in the transaction understand the accounting. If this is in ORE, there is no loan on the books, the "original contract" has been written off and has nothing to do with this transaction. Using the numbers given as hypotheticals, if the property is being carried in ORE as $3,000 and they sell it for the appraised value of $5,000, they will have a gain on ORE (ignoring any costs).

I also don't think they should sell for more than appraised and finance it if they don't understand what this means to them vis a vis high cost loans, high ltv loans, etc.

But they need to realize they have no loan on their books!