Orig­i­na­tion

National Mortgage News - - Contents - By Brad Finkel­stein

Ap­prais­ers balk at plan to ‘vir­tu­ally elim­i­nate’ SBA prop­erty val­u­a­tions

The House of Rep­re­sen­ta­tives passed two bills that would tie ap­praisal waivers for Small Busi­ness Ad­min­is­tra­tion loans to bank rules for com­mer­cial real es­tate loans, de­spite ob­jec­tions from the Ap­praisal In­sti­tute about its mem­bers be­ing cut out of trans­ac­tions.

The House of Rep­re­sen­ta­tives passed two bills that would tie ap­praisal re­quire­ments for Small Busi­ness Ad­min­is­tra­tion loans to bank reg­u­la­tors’ re­quire­ments for all com­mer­cial real es­tate loans. But the plan has been met with op­po­si­tion from the Ap­praisal In­sti­tute, which claims the SBA will take on un­nec­es­sary risk if its mem­bers are cut out of trans­ac­tions.

Fol­low­ing a rule change by the Fed­eral Re­serve Board, the Of­fice of the Comptroller of the Cur­rency and Fed­eral De­posit In­sur­ance Corp. ear­lier this year, banks are not re­quired to ob­tain ap­praisals on the col­lat­eral back­ing com­mer­cial real es­tate loans if the prop­erty

is worth less than $ 500,000. Pre­vi­ously, the thresh­old was $ 250,000.

The bills, H.R. 6347, the “7(a) Real Es­tate Ap­praisal Har­mo­niza­tion Act,” and H.R. 6348, the “Small Busi­ness Ac­cess to Cap­i­tal and Ef­fi­ciency Act,” would re­move the cur­rent statu­tory $250,000 limit for SBA loan ap­praisal waivers and in­stead rely on the bank­ing reg­u­la­tors’ stan­dards. Both bills passed on a voice vote taken on Sept. 25, but their fate in the Se­nate is un­clear.

The higher thresh­olds would “vir­tu­ally elim­i­nate” the need to get ap­praisals for SBA 7(a) and 504 loans, the Ap­praisal In­sti­tute warned in a let­ter to House Speaker Paul Ryan be­fore the vote. And while bank­ing reg­u­la­tors

re­quire CRE lenders to ob­tain prop­erty eval­u­a­tions on col­lat­eral el­i­gi­ble for ap­praisal waivers, a sim­i­lar re­quire­ment is not in­cluded in the SBA bills, the ap­praisal group said.

As a re­sult, the bills “fail to fully align the SBA re­quire­ments with those of the fed­eral bank reg­u­la­tory agen­cies,” the Ap­praisal In­sti­tute let­ter reads.

“Eval­u­a­tions have spe­cific de­vel­op­ment and re­port­ing re­quire­ments smaller in scope than ap­praisals; how­ever, the SBA does not re­quire eval­u­a­tions, and nei­ther bill in­cludes cor­re­spond­ing eval­u­a­tion re­quire­ments,” the group added.

With the 2018 fed­eral fis­cal year just end­ing, the SBA has guar­an­teed more than 58,000 loans un­der the 7(a) pro­gram to­tal­ing over $24.5 bil­lion. Mean­while, nearly 5,800 loans to­tal­ing more than $ 4.6 bil­lion have been guar­an­teed un­der the 504 pro­gram, ac­cord­ing to SBA data.

In the 7(a) pro­gram, loan bal­ances be­tween $350,000 and $2 mil­lion ac­count for 44% of to­tal dol­lar vol­ume. About 30% of the to­tal dol­lar vol­ume was for 7(a) loans over $2 mil­lion. In the 504 pro­gram, about 56% of the dol­lar vol­ume went to loans be­tween $350,000 and $2 mil­lion, and 34% of the dol­lar vol­ume was for loans over $2 mil­lion.

The Ap­praisal In­sti­tute “is mak­ing a moun­tain out of a mole­hill” when it comes to the pair of bills, said Chris Hurn, CEO of Foun­tain­head Com­mer­cial Cap­i­tal, an SBA 504 lender based in Or­lando, Fla.

When it comes to risk, non­bank lenders like Foun­tain­head “are just as care­ful as any reg­u­lated en­tity and we should be or we will go out of busi­ness,” Hurn said.

Even though he sup­ports the leg­is­la­tion, Foun­tain­head will likely still get an ap­praisal on prop­er­ties in trans­ac­tions in the $300,000 to $400,000 range. “I just think it’s a good best prac­tice,” Hurn said. “Part of good com­mer­cial real es­tate lend­ing is mak­ing sure you un­der­stand what your col­lat­eral is worth.”

Cur­rently, the SBA does not re­quire lenders to ob­tain prop­erty eval­u­a­tions on loans ex­empt from ap­praisal re­quire­ments. But noth­ing in the cur­rent bills to raise the ap­praisal

waiver thresh­old would pre­vent the SBA from re­quir­ing eval­u­a­tions in the fu­ture, agency spokes­woman Carol Wilk­er­son said in an email to NMN.

By not spec­i­fy­ing how SBA lenders should as­sess the value of col­lat­eral, the bills are “too broad be­cause they are en­abling any kind of val­u­a­tion, they’re not spe­cific about a par­tic­u­lar type of tool, whether it’s an ap­praisal, whether it’s a com­mer­cial eval­u­a­tion or even a bro­ker price opin­ion,” said Randy Fuchs, the prin­ci­pal at Box­wood Means, a Stam­ford, Conn., com­pany that pro­vides eval­u­a­tions on small bal­ance com­mer­cial loans.

The goal of the bills is to re­duce lender costs and re­duce third-party bor­rower costs for small busi­nesses try­ing to grow, Fuchs said. “We would hope fur­ther dis­cus­sions about the leg­is­la­tion would re­fine it so that the min­i­mal tool … would be eval­u­a­tions.”

A com­mer­cial prop­erty eval­u­a­tion “is a rig­or­ous, de­tailed anal­y­sis that may use the sales com­par­i­son ap­proach and/or the sales and in­come ap­proach” to de­ter­mine a value, he ex­plained. A BPO may just be a sim­ple av­er­age of three com­pa­ra­ble prop­erty val­u­a­tions. Such val­u­a­tions are not typ­i­cally the core com­pe­tency of the per­son per­form­ing them.

On the other hand, us­ing ap­praisals for many of these loans “is like us­ing a sledge­ham­mer to kill a fly,” he said. Com­mer­cial eval­u­a­tions are more like us­ing “a fly­swat­ter,” be­cause they are more ef­fi­cient and more cost-ef­fec­tive. Com­mer­cial ap­praisal costs do not ad­just based on the project size, so the costs are the same on a $300,000 deal as they are on a $3 mil­lion one, he noted.

Tech­nol­ogy and data an­a­lyt­ics can also pro­vide re­li­able prop­erty val­u­a­tions and keep risk in check, said John Moshier, the pres­i­dent of ReadyCap Com­mer­cial, an SBA 7(a) lender.

“We would get some type of eval­u­a­tion done [if the bill passed] but there are more cost-ef­fec­tive ways to do it out there,” he said. “That’s called pru­dent lend­ing. In my mind you need to have some type of method­ol­ogy to eval­u­ate” a prop­erty’s worth. “You have to be a pru­dent lender, no mat­ter what the reg­u­la­tions say, what the law says.” The bills are “right-siz­ing” the SBA pro­gram with con­ven­tional com­mer­cial real es­tate lend­ing when it comes to ap­praisal re­quire­ments.

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