When should a banker get a new appraisal on collateral? That question came up at the regulator panel hosted by the Minnesota Bankers Association earlier this month in Duluth. James LaPierre, the FDIC Director of the Kansas City Region offered guidance.
“The expectation is that you will have a current appraisal,” LaPierre said. “The most likely need for an appraisal less than annually is if the existing appraisal does not show what is happening in the project.”
LaPierre suggested an example of a condominium project in which the bank loaned the developer money based on a business plan to sell each of the condos. Mid-project, the developer decides to rent the condos. In that situation, “we would expect a new appraisal,” he said.
“The more likely scenario is we will simply adjust the appraisal. If we see a project where the business plan says we are going to sell eight units a month for 10 months and the sales level is actually four units a month with the sales price $25,000 per unit less than anticipate, that will be an adjustment — assuming you are down to a collateral bases where the loan has become collateral dependent,” LaPierre said.
“If it is not collateral dependent and the borrowers continue to make payments, it is a much more difficult thing because the question becomes ‘does that borrower have both the capacity and the willingness to continue?’ We have seen cases where borrowers had significant other assets, but they get to the point where they realize that it is no longer a good economic decision for them to continue to pay, and if they are paying it is very difficult to look forward and say they are going to get to that point.”
Blake Paulson of the Office of the Comptroller of the Currency, had this to say: ”On appraisals, it is very important that you have done your analysis. And if it is a severe problem loan, I would expect every quarter that you have done you analysis of what that collateral is worth, given recent information. If the examiners see that you have done that analysis and it is reasonable, they are much more likely to accept that than if they open the loan file and there is no appraisal and it looks like the economics have changed. You are much better off doing the analysis yourself and let the examiners validate that, versus forcing the examiners to do their own analysis.”
Look for in-depth coverage of the regulatory panel in the July 15 edition of NorthWestern Financial Review magazine.