Real Estate Analysis and Commentary in Hampton Roads

Lack of Appraisals Cited in Latest Material Loss Reviews
March 11th, 2010 10:42 AM
Lack of Appraisals Cited in Latest Material Loss Reviews

A failure to obtain appraisals was chief among a list of reasons cited in the latest material loss review of failed banks. The reasoning was listed by the Office of the Inspector General of the Federal Deposit Insurance Corp. in its report on why six bank subsidiaries of Security Bank Corporation failed and were seized in July 2009.

According to the FDIC, each of the Security Banks was found to be in contravention of Part 323 of the FDIC Rules and Regulationsregarding appraisals. This finding involved the failure of the banks to obtain updated appraisals on properties that reflected current market conditions, according to the report. Furthermore, prior appraisals were found to be weak and contained stale comparable information, particularly when considering current market conditions.

Prior evaluations also contained unrealistic absorption rates, holding periods, sales prices, and discount rates. Other weaknesses noted included the failure to (1) obtain new appraisals or evaluations prior to the renewal of construction or development projects that were either stalled, or were completed but had not met their original sales projections and (2) obtain new appraisals or evaluations despite significant changes in market conditions, according to the report.

The failures of the Security Banks cost the FDIC’s Deposit Insurance Fund approximately $807 million, according to its Inspector General’s report. Interestingly, the Security Banks were examined in 2007 and 2008, with starkly different results. While most of the banks were reported to have few significant loan underwriting and credit administration weaknesses in 2007, by 2008 (following the subprime meltdown) these types of weaknesses were found to exist at each of the banks. The Inspector General drew the following conclusion:

“…banks may compromise sound credit principles in a highly competitive market. In that regard, going forward, it would be prudent for examiners to place earlier and greater emphasis on the significance of sustaining proper underwriting in examination reports when high concentrations elevate a bank’s risk profile.”

To read the full FDIC Inspector General’s report, visit www.fdicoig.gov/reports10/10-020.pdf .


Posted in:General
Posted by Woody Fincham, SRA on March 11th, 2010 10:42 AMPost a Comment

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