How Lenders Think: Do I Need an Appraiser?

Editor's Note: This story is second in a series. The questions come from bankers and examiners.  Moye, an expert in banking practices, explains the importance of the information this way: "Many residential appraisers mostly complete form reports for mortgage brokers and may not understand how insured institutions function. With the demise of many subprime companies and the tightening underwriting by the sponsored agencies, many appraisers will have to move to other types of clients or leave the profession."

How Lenders Think: Do I need an Appraiser?

By Calvin Moye, SRA, GRI

Set up: A commercial bank officer inquired about the flexibility of the Federal Regulations and Guidelines for appraisals when the proposed security is several residential lots.

Question: Tract Development and Evaluations

My bank has a builder who is purchasing 10 lots in a developed subdivision from the developer. The sales price is $580,000.  All of the lots are similar in size, shape, view, access, and located on the same street. It is very probable that each lot carries a similar estimated value of $58,000. The repayment source is the retail sale of each individual lot. According to the banking agency rules and regulations, I would need to order an appraisal. However, if other recent lot sales in the same subdivision on similar lots are available, could an evaluation be done by a qualified bank employee not involved in loan production?

Response Background

To assist in understanding the banker's position, a review of a few definitions as published in the banking regulations follows:

* Tract development means: "a project of five units or more that is constructed or is to be constructed as a single development."

* Transaction value means: "(1) For loans or other extensions of credit, the amount of the loan or extension of credit."

* A federally-related transaction means: "any real estate-related financial transaction in which the agencies engage, contract for, or regulate, and that requires the services of an appraiser."

* Real estate-related financial transaction means: "any transaction involving:

(1) The sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof; or (2) The refinancing of real property or interests in real property; or (3) The use of real property or interests in property as security for a loan or investment, including mortgage-backed securities."

Oddly, the words "threshold" and "evaluation" are not defined in the regulations but the words are used throughout the regulations and guidelines. There is a simple list of the required content for an evaluation but not a definition. Appraisals (as defined by the regulatory agencies) are required on transactions (loan amount in most cases) greater than the $250,000 threshold. The threshold was originally known as the deminimus.