OCC Issues Guidance to Lenders on Katrina
2006-5a.pdf (application/pdf Object)
The OCC issued guidance to lending institutions on February 3, 2006 related to Hurricanes Katrina. As OCC Bulletin OCC 2006-5 states, Hurricane Katrina had a devastating effect on the U.S. Gulf Coast region that continues to affect the business activities of the financial institutions serving the area. It is critical, however, that the agencies are aware of the true condition of each affected financial institution.
One of the provisions of the guidance addresses real estate values and appraisal waivers as outlined:
Real Estate Values. The disaster-affected areas and neighboring evacuee locations have experienced significant fluctuations in real estate values. For both existing real estate loans and new loans, examiners should assess the institution’s policies and practices with regard to estimating values on collateral in real estate markets that have experienced a significant, but possibly temporary, decrease or increase in real estate values as a result of the hurricane. When reviewing an institution’s estimates of collateral values, examiners should ascertain whether the values are based on assumptions that are both prudent and realistic.
Appraisal Waivers. The agencies granted a three-year waiver from their appraisal regulations to institutions affected by Hurricanes Katrina (ending August 29, 2008) and Rita (ending September 24, 2008). These appraisal waivers cover real estate-related transactions in certain Alabama, Mississippi, and Texas counties and Louisiana parishes. To qualify for the waiver, a financial institution needs to document that: (1) the property involved was directly affected by these disasters or the transaction would facilitate recovery from the disaster; (2) there is a binding commitment to fund the transaction that is made within three years after the date these disasters were declared; and, (3) the value of the real property supports the institution’s decision to enter into the transaction. When an institution decides to rely on the appraisal waiver for a particular real estate-related transaction, the institution should provide sufficient documentation in the loan file to support its credit decision and valuation of the collateral. Examiners should continue to review transactions exempted from the appraisal regulations.
These guidelines may result in the lending institutions looking for a better handle on existing loans and possibly the new loans they are making. These two ideas outlined above seem incongruous to me. On the one hand they are suggesting that real estate values are important to know and that a change in the values is vital to know about. On the other, appraisals can be waived under certain conditions. Sounds like to me that those with experience and knowledge in the affected areas can provide a value added service to their lender clients by consulting with them on valuation issues. There may be a need for traditional and non-traditional valuation products coupled with geographical expertise. Just a thought after reviewing this document. One thing is certain, many institutions have a daunting task ahead and assistance from valuation experts is going to be critical to long-term solvency.