IAS Says New Appraisal Guidelines Put More Stress on Lenders

New guidelines released last month for real estate appraisals and evaluations will require any transaction originated or purchased by certain agencies to report conditions that affect the estimate of the collateral's market value.

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The ""Federal Financial Institutions Examination Council"":http://www.ffiec.gov/ (FFIEC) for real estate appraisals and evaluations require transactions to address the actual physical condition and characteristics as well as the economic and market conditions that may affect value.

Analytical methods or technological tools like automated valuation models (AVMs) can no longer be used.

The FFIEC is comprised of five federal agencies: the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of Thrift Supervision.

According to the new guidelines, an institution's board of directors or its designated committee is responsible for adopting and reviewing policies and procedures that establish an effective real estate appraisal and evaluation program.

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The program should, among other things, provide for independence of the persons ordering performing and reviewing appraisals or evaluations; establish selection criteria and procedures to monitor the performance of appraisers; and ensure that appraisals and evaluations contain sufficient information to support the credit decisions.

""To their credit, AVMs have always represented, and still represent, a quick, efficient, and low-cost way to gather an abundance of sales information,"" said Ryan Tomazin, president of ""Integrated Asset Services"":http://www.iasreo.com/, a Denver-based default management and residential collateral valuation company.

He continued, ""The technology will continue to serve as an adequate assessment tool for a good number of applications, but for interagency transactions, the standard's been raised.""

Tomazin suggests that, given the additional requirements imposed by the regulators, lending institutions will need to look at so-called “hybrid” AVMs for certain applications. These next-generation models integrate a professional third-party inspection into the analytics to deliver a current view of subject and neighborhood condition, condition-adjusted value, and market price trends.

“While the new FFIEC guidelines add another level of difficulty to mortgage lenders, raising the bar like this will surely be good for consumers and for the industry as a whole,” says Tomazin. “It’s been clear to us for some time we needed a full suite of valuation solutions for lenders to utilize across an increasingly wide range of applications.”

Under the new FFIEC guidelines, transactions with a value equal to or less than $250,000 are permitted to obtain an evaluation of real property collateral instead of an appraisal.