The Bank may use an existing Appraisal or Evaluation to support an advance of new funds without a new appraisal or evaluation if the value of the total loan continues to be supported by an existing appraisal and is consistent with loan to value limits. The credit file must contain facts and analysis documents supporting the Bank’s conclusion that the appraisal or evaluation remains valid.
Criteria for determining whether an existing appraisal or evaluation remains valid will vary depending upon the condition of the property and the marketplace, and the nature of any subsequent transaction. Factors that could cause changes to originally reported values include:
•the passage of time;
•the volatility of the local market;
•changes in the terms and availability of financing;
•natural disasters
•the limited or over supply of competing properties;
•improvements to, or lack of maintenance of, the subject property or competing surrounding properties;
•changes in the underlying economic and market assumptions, such as capitalization rates and lease terms;
•changes in zoning, building materials or technology; or
•environmental contamination.
The Bank must document the information sources and analyses used to conclude that an existing appraisal or evaluation remains valid for subsequent transactions.
Evaluations of real estate collateral in lieu of appraisals are allowed for loan renewals and refinancings, unless (i) new funds are advanced over reasonable closing costs, (ii) there is a material change in market conditions or (iii) the physical aspects of the property threaten the institution’s real estate collateral protection. See the form Renewal/Extension/Refinancing Questionnaire located at the end of this Chapter. This will assist the Bank in documenting the inquiry made to determine if a new appraisal is necessary.
A Bank decision to reevaluate the real estate collateral should be guided by the exemption for renewals, refinancings, and other subsequent transactions. Loan workouts, debt restructurings, loan assumptions, and similar transactions involving the addition or substitution of borrowers may qualify for the exemption for renewals, refinancings, and quality of the loans, the soundness of the underlying collateral and the validity of the existing appraisal or evaluation.
FOR EXAMPLE: The work-out plan on a $5 million problem loan calls for a regulated institution to receive an assignment of a $2 million note from the borrower’s relative secured by a deed of trust on a different property. This is considered a real-estate financial transaction. Whether an evaluation in lieu of an appraisal on new real estate collateral in a loan workout situation is allowed depends on loan quality, collateral quality, and validity of an existing appraisal or evaluation.
A reappraisal would not be required when the Bank advances funds to protect its interest in a property, such as to repair damaged property, because these funds should be used to restore the damaged property to its original condition. If a loan workout involves modification of the terms and conditions of an existing credit, including acceptance of new or additional real estate collateral, which facilitates the orderly collection of the credit or reduces the Bank’s risk of loss, a reappraisal or reevaluation may be prudent, even if it is obtained after the modification occurs.
A Bank may engage in a subsequent transaction based on documented equity from a valid appraisal or evaluation, if the planned future use of the property is consistent with the use identified in the appraisal or evaluation. If a property, however, has reportedly appreciated because of a planned change in use of the property, such as rezoning, an appraisal would be required for a federally related transaction, unless another exemption applied.