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ó STATEMENT O N , ....... ....... I -r? + REAL ESTATE APPRAISALS PRESENTED TO Ÿhù ) COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE NS,, C O F THEyCOMMITTEE ON GOVERNMENT OPERATIONS, BY STEVEN A. SEELIG ASSOCIATE DIRECTOR, DIVISION OF LIQUIDATION FEDERAL DEPOSIT INSURANCE CORPORATION W&BN£S©A¥, DECEMBER 11, 1985, ROOM 2203, RAYBURN HOUSE OFFICE BUILDING Mr. Chairman, members of the Subcommittee, I am Steven A. Seelig, Associate Director of the FDIC's Division of Liquidation. In your invitation you requested that I address certain matters relating to the liquidation related to specific activities appraisal questions you of the FDIC, practices. have I put and will forth specifically, first and respond then those to the summarize our observations on the appraisals performed on the real estate assets the FDIC acquired as a result of the Continental assistance transaction. The FDIC's liquidation portfolio currently contains estate with a book value of about $300 million owned real and an appraised value of approximately $230 million. The FDIC acquires real estate as assistance a result of bank troubled institutions. failures or transactions with The real estate in our portfolio either came directly from banks' portfolios or resulted from foreclosure actions initiated by the FDIC. As a result, the book value represents the amounts bid at foreclosure sales and the values of the properties as carried on the books of the banks at the time of failure. These values are in no way reflective of the values associated with the original appraisals that supported the loans made on the properties. In order to evaluate and administer real estate assets acquired as a result of professional policies failed real or merged estate banks, appraisers. and procedures which address the The FDIC FDIC regularly has employs established the use of appraisers, frequency of appraisals, and uniform instructions to appraisers. the 2 - - As a result of the failure activity in recent years, the FDIC is responsible for liquidating real estate mortgages with a book value in excess of $900 million in addition to its owned real estate of about procedures, we require independent appraisals on all owned properties as well as for $300 all mortgage determine million. of the As part underlying loans. These the underlying of our liquidation collateral appraisals value associated become of the the asset with basis by and make delinquent which we decisions relating to foreclosure bids, settlement offers from borrowers and the actual sale of owned properties or loans. Before we sell any property a current appraisal must be obtained. By current appraisals, old. Appraisals suitable writing. we mean those that are less than one year must be qualifications performed and all by an impartial appraisal By never compromising on the reports requirement person must be of in for a written report we have found that we avoid the poorer quality work that is invited by allowing verbal and the need for the appraisals. appraised value Should an emergency arise figure be such that it is required prior to the time necessary to prepare a written report, we will accept a verbal appraisal but require a subsequent written confirmation and full appraisal report. In order to assure that the appraisals we obtain are consistent with our purposes in valuing the property, and to assure that account officers do not deviate from our policies, the FDIC has developed 3 - specific written appraiser. We require instructions report. has appraisal by - instructions that are provided the appraiser to acknowledge including a copy of them in the to receiving our final appraisal For all non single family residential properties, the FDIC established such instructions. Included in our appraisal instructions are the following key points: 1. Appraisals are to be made assuming a sale on a cash basis. If the appraiser feels uncomfortable with supplying a valuation on a cash basis, due to the lack of comparables, a valuation on typical terms may be used instead; however, the terms must be spelled out. 2. Appraisals sales are expected prospects conditions. speculation With on to reflect considering this future values existing requirement we rates of try inflation based on economic and and avoid future changes in interest rates. 3. an Whenever an appraiser supplies valuation based on typical terms, the appraiser should provide us with the percent down payment, maturity of the loan, whether or not it incorporates balloon payments and the interest rate assumption. - 4 4. All appraisals are to be run on an "as is" basis. 5. The appraiser is to estimate the cost to complete essential repairs and to cure any violations and the appraiser have is required to state whether these expenses been considered in estimating the property's appraised value. 6. The FDIC believes in an intensive marketing program and the appraiser is to assume that the property will be sold within six months of acquisition. 7. All appraisals, including updates, must be in writing. 8. Appraisals should be based on existing zoning. However, the appraiser may value the property based on current zoning and any other zoning the appraiser feels is likely to be obtained within a short period of time. 9. In the case appraiser is of a valuing distressed the property property solely where on a the land value basis, the appraiser should provide the costs for demolition and/or removal and make appropriate adjustments to the land's value. 10. The appraiser should provide data within the appraisal report as to the annual of any past due taxes. property taxes and the amount - 5 As you may be aware, quantitative field, even though appraising valued become a it is by no mean scientific and in many ways, may be viewed more as an art than science. may be has differently by Hence, the same property different appraisers. Consequently, whenever the independent appraised value of a mortgage property, or a property we own, exceeds $250,000, our employees are required to obtain a second independent appraisal. independent appraisals vary by 30% In addition, should the two or more, and the difference cannot be reasonably reconciled or justified by our own real estate staff, a third appraisal is obtained. We attempt, as best possible, to monitor appraisers and to stop using those who consistently provide us with high or low appraised values. Unfortunately, with changing economic conditions and changing markets we occasionally have experienced situations where we have held properties for unnecessarily long periods of time because the appraised values exceeded what the market was willing to pay for the properties. In using appraisers we require that appraisers designation or another comparable designation. have the MAI There are all too many individuals who are only too willing to sell their services as appraisers required but who for these have not professional had the formal designations. always be on guard for conflicts of interest. employ the manage it. same Such firm to both actions education appraise clearly Moreover, is one must We attempt to never a property present that the and market or appraiser with a conflict as well as sending the wrong signal regarding the client's desire for a truly objective independent appraisal. 6 - - Typically, the appraisals obtained are of good quality, due in p a r k to our procedure of evaluating the appraisers' qualifications prior to ordering appraisals an are appraisal. received and However, if the occasionally, responsible inadequate appraiser is not receptive to improving the quality of the work, we will discontinue use of that appraiser. In the event gross errors are encountered or appraisals contain false statements, the FDIC may refer the matter to the appropriate certifying body. As part of the FDIC assistance transaction with Continental Illinois National Bank, the FDIC acquired about $400 million in real estate mortgages and real estate owned. nonperforming. land All of these loans and assets were Most of the assets that we acquired were originally development, condominium construction, conversion loans made to an original borrower. or condominium Most of these loans were originated either prior to 1978 or during the period 1978 to 1980 when interest rates were low and inflation in real values was high. property With the subsequent sharp rise in interest rates, these sectors of the real estate market faced severe problems. condominium problems and sales chose collapsed, two the bank alternative was faced solutions. with One was As potential to put additional funds into the developments hoping to buy time and see a resurgence in property values or secondly, to find a new buyer for the mortgaged property at a price sufficient to cover the original loan balance plus additional operating expenses. - 7 Loan presentations noted that appraisals were expected to support the loan balance or that preliminary appraisals estimates support the value and that such reports would be delivered later. In at least one instance the bank relied on an appraisal performed for the developer. In appraising condominium properties, the typically arrived at a market value for individual multiplied the appraised value. costs, or a value by the number of units appraiser units and then to arrive at No allowance was made for holding costs, discount that might be necessary for a bulk Similar practices were employed in valuing land holdings. an sales sale. In some cases the appraisals incorporated an assumption of high appreciation rates yielding high market values in 1988 and 1992 when the loans would become due. These appreciation supported by current market conditions. rates, unabsorbed included in some inventory of the or any reports. rates, of course, were not No recognition of vacancy other market It appears information that some of was the appraisals were developed to support the proposed loan rather than to give a true current market value of the underlying collateral.
@FedFRASER