Bank Regulators Forcing Banks to Order New Appraisals


Bank examiners will direct management to obtain new appraisals when needed due to market or project changes, and to take necessary action should those appraisals indicate that loans are no longer adequately supported by collateral values. That announcement was made by John C. Dugan, Comptroller of the Currency, during a June 5 Senate Banking, Housing and Urban Affairs Committee hearing titled “The State of the Banking Industry.”

Dugan said that in many cases, an adjustment by bank management to original appraisal assumptions to reflect current market conditions, rather than a full reappraisal, may be sufficient, but that examiners should give bankers reasonable time frames for obtaining updated appraisals and making their assessments. Dugan said the Treasury Department also reiterated the importance of maintaining open and constructive communications with bankers throughout this process.

The move comes in order to address the current state of the housing market. Dugan explained that “one of the most controversial practices” associated with the significant real estate downturn in the late 1980 arose in circumstances “where the sharp decline in markets meant that appraisals had become outdated.”

“In too many instances, because bankers were reluctant to adjust appraisals to reflect current market conditions, examiners were forced to unilaterally make such adjustments,” Dugan said.

The hearing was a follow up to the March 4, 2008, hearing of the same name. Other speakers included: Sheila Bair, chair, Federal Deposit Insurance Corporation; John Reich, director, Office of Thrift Supervision; JoAnn Johnson, chair, National Credit Union Administration; and Donald Kohn, vice chair, Board of Governors, Federal Reserve System.

Based on the number of current appraisals that I am seeing with 2006 and early 2007 comps used, even an “updated” value will be worthless. Recent, good quality comps are out there, and appraisers should be using them.

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