Small banks count on new ap­praisal rule to boost lend­ing

The re­moval of costly ap­praisal re­quire­ments on tens of thou­sands of smaller com­mer­cial prop­er­ties could help com­mu­nity banks bet­ter com­pete for loans they say they have been los­ing to non­bank lenders.

National Mortgage News - - Contents - By Andy Peters

Com­mu­nity bankers are count­ing on a new fed­eral rule that re­laxes re­quire­ments on real es­tate ap­praisals to help them bet­ter com­pete with non­bank lenders on smaller com­mer­cial real es­tate loans, but ap­prais­ers them­selves say that the change will only en­cour­age banks to take more risks.

The three fed­eral bank reg­u­la­tory agen­cies re­cently in­creased the thresh­old for loans that re­quire an out­side ap­praisal on the prop­erty used as col­lat­eral from $250,000 to $ 500,000. The rule was last up­dated in 1994 and lenders say reg­u­la­tors changed it be­cause it did not ac­cu­rately re­flect cur­rent prop­erty val­ues.

The rule change will re­move the costly ap­praisal re­quire­ment on tens of thou­sands of com­mer­cial prop­er­ties, which could al­low banks to make more loans in this size range, said Justin Bakst, the di­rec­tor of cap­i­tal mar­kets at CoStar. As of April 20, roughly 154,000 prop­er­ties na­tion­wide were each val­ued at be­tween $250,000 and $ 500,000, ac­cord­ing to CoStar. Those prop­er­ties are val­ued at about $68 bil­lion.

Though th­ese loans should be right in com­mu­nity banks’ wheel­house, many small banks have ac­tu­ally shied away from them be­cause they be­came too costly to make once ap­praisal fees were fac­tored in, said Jon Winick, CEO at Clark Street Cap­i­tal, a Chicago firm that ad­vises banks on loan sales.

“To spend $ 3,500 for an ap­praisal on a $250,000 loan, that wasn’t worth it,” Winick said.

Com­mu­nity bankers said that the rule change should help them bet­ter com­pete with in­surance com­pa­nies, in­di­vid­ual in­vestors and other non­bank lenders that were not sub­ject to the same ap­praisal re­quire­ments. Elim­i­nat­ing in-per­son ap­praisals for loans of less than $ 500,000 will both re­duce costs for small banks — al­low­ing them to of­fer bet­ter rates and terms — and speed up de­ci­sion-mak­ing, they said.

Banks had not of­fi­cially asked for an in­crease in the thresh­old since it was last up­dated in 1994, said Chris Ca­purso, an at­tor­ney at Hud­son Cook in Rich­mond, Va., who ad­vises banks on lend­ing laws. But a fed­eral law that re­quires fed­eral agen­cies to re­view their reg­u­la­tions ev­ery decade opened the door for the cur­rent push, Ca­purso said.

Ad­di­tion­ally, the price of com­mer­cial real es­tate has sig­nif­i­cantly in­creased since the fi­nan­cial cri­sis, which made it more palat­able for reg­u­la­tors to boost the thresh­old, said Curt Ever­son, pres­i­dent of the South Dakota Bankers As­so­ci­a­tion.

Banks will still need to value their col­lat­eral, but in­stead of hir­ing a cer­ti­fied in­de­pen­dent ap­praiser, they now can com­mis­sion an eval­u­a­tion of prop­er­ties in this value range us­ing pub­licly avail­able real es­tate data.

“Eval­u­a­tions cost less than ap­praisals, take less time than ap­praisals and do not re­quire the bank to go out and find a cer­ti­fied ap­praiser,” Ca­purso said. “All of this adds up to banks, es­pe­cially banks with fewer re­sources, be­ing able to make more CRE loans.”

How­ever, ap­prais­ers have ques­tioned why reg­u­la­tors are mak­ing it eas­ier for banks to make CRE loans at a time when they’ve been con­cerned about over­ex­po­sure to the sec­tor. The rule change is “yet another re­lax­ation of sound col­lat­eral risk poli­cies that pro­vide min­i­mal ben­e­fit to fi­nan­cial in­sti­tu­tions while cre­at­ing sig­nif­i­cant po­ten­tial risk to the fi­nan­cial mar­kets as well as con­sumers,” the Col­lat­eral Risk Net­work, which rep­re­sents ap­prais­ers and risk man­agers, wrote in a Septem­ber let­ter to reg­u­la­tors.

The Fed­eral De­posit In­surance Corp., the Of­fice of the Comptroller of the Cur­rency and the Fed­eral Re­serve Board dis­missed con­cerns about the change pos­ing in­creased risk to the fi­nan­cial sys­tem.

“The agen­cies … de­ter­mined that the in­creased thresh­old will not pose a threat to the safety and sound­ness of fi­nan­cial in­sti­tu­tions,” they said in a joint press re­lease.

Bankers in ru­ral ar­eas have also sup­ported the rule change, as they be­lieve it will help ad­dress the prob­lem of a dearth of com­mer­cial real es­tate ap­prais­ers in cer­tain sec­tions of the coun­try.

“The sup­ply of li­censed and cer­ti­fied ap­prais­ers, es­pe­cially those will­ing to work in ru­ral

ar­eas, has di­min­ished,” Ever­son wrote in a Septem­ber let­ter to reg­u­la­tors.

“In too many in­stances … own­ers of small busi­nesses on main street, farm­ers and ranch­ers seek­ing to re­struc­ture cur­rent year op­er­at­ing loans into longer term notes in­cur higher costs … be­cause of ap­praisal thresh­old re- quire­ments that have not been up­dated in decades,” Ever­son wrote.

Some bankers had called for reg­u­la­tors to raise the ap­praisal- re­quire­ment thresh­old to $ 1 mil­lion, say­ing that the $ 500,000 cap would still shut them out of too many deals. How­ever, Ca­purso noted that reg­u­la­tors based the $ 500,000 fig­ure on the in­crease in the Fed­eral Re­serve’s Com­mer­cial Real Es­tate Price In­dex over the past 24 years.

“The agen­cies didn’t come to the limit hap­haz­ardly by merely dou­bling the pre­vi­ous limit,” Ca­purso said. “There’s a ba­sis to it, and I think it’s a fair one to use.”

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