Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING
SUPERVISION AND REGULATION


SR 95-27 (SUP)
May 3, 1995

TO THE OFFICER IN CHARGE OF SUPERVISION
          AT EACH FEDERAL RESERVE BANK


SUBJECT: Interagency Statement on Appraisals for Affordable Housing Loans

                        On March 10, 1995, the federal banking regulatory agencies jointly issued a policy statement clarifying their appraisal requirements for affordable housing loans.  A copy of this statement is attached.

                        As set forth in the statement, the agencies expect that lenders will ensure that appraisals for affordable housing projects consider and discuss the effect of certain types of financial assistance (sometimes referred to as intangible items), such as low-income tax credits, rent subsidies, and grants.  The statement also emphasizes that lenders should engage appraisers who are competent to perform appraisals of affordable housing projects, are knowledgeable about the various types of financial assistance programs, and are able to appropriately identify and consider the effect of such programs on the appraised value.

                        Reserve Banks should distribute this policy statement to state member banks and bank holding companies.  Attached is a suggested transmittal letter that may used for this purpose.  Any questions on this policy statement or the Board's appraisal regulation should be directed to Stanley Rediger 202/452-2629 or Virginia Gibbs at 202/452-2521.

Stephen C. Schemering
Deputy Director

ATTACHMENTS TRANSMITTED ELECTRONICALLY BELOW


Attachment
Interagency Statement on Appraisals for
Affordable Housing

SUGGESTED TRANSMITTAL LETTER TO
BANK HOLDING COMPANIES AND STATE MEMBER BANKS

TO THE CHIEF EXECUTIVE OFFICER OF BANK HOLDING COMPANIES AND STATE MEMBER BANKS

                        The Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision (collectively, the agencies) have jointly issued the attached Interagency Statement on Appraisals for Affordable Housing Loans, dated March 10, 1995, to clarify their real estate appraisal regulations.

                        As set forth in the statement, the agencies expect that lenders will ensure that appraisals for affordable housing projects consider and discuss the effect of certain types of financial assistance (sometimes referred to as intangible items), such as low-income tax credits, rent subsidies, and grants.  The statement also emphasizes that lenders should engage appraisers who are competent to perform appraisals of affordable housing projects, are knowledgeable about the various types of financial assistance programs, and are able to appropriately identify and consider the effect of such programs on the appraised value.

                        If there are any questions, please contact (insert name of Reserve Bank staff).

Attachment


Office of the Comptroller of the Currency
Federal Reserve Board
Federal Deposit Insurance Corporation
Office of Thrift Supervision

Interagency Statement on Appraisals
for Affordable Housing Loans

March 10, 1995

Purpose

This statement clarifies the position of the Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of Thrift Supervision (collectively, the agencies) on the inclusion of various types of financial assistance, sometimes referred to as intangible items, in the determination of market value when a federally regulated financial institution obtains an appraisal for an affordable housing construction or permanent mortgage loan.

Background

The agencies have long encouraged financial institutions to extend prudent credit to promote community development.  By taking the initiative in community development, institutions may establish new markets, reinforce their identity as community institutions, and enhance their performance.

An institution that extends credit for the development of an affordable housing project should consider the financial assistance that frequently accompanies these projects, such as low-income housing tax credits (LIHTC), subsidies, and grants. Such financial assistance creates an incentive for developers and investors to undertake the project.  

The agencies understand that some institutions have received appraisals where the appraiser has not appropriately considered the various types of financial assistance that is provided to affordable housing projects in the estimate of the project's market value.  When the benefits of such financial assistance is not appropriately reflected in a project's appraisal, the estimated cash flow of the project is negatively affected, resulting in a lower market value.  Consequently, a proposed affordable housing loan may not have a loan-to-value ratio sufficient to satisfy the standards of the agencies' real estate lending guidelines or to receive favorable treatment under the agencies' risk-based capital rules.

Statement

When a regulated financial institution obtains an appraisal for an affordable housing project, the appraisal should contain a market value estimate that reflects the real estate collateral and typical interests in the real estate on a cash or cash equivalent basis.1 The agencies' appraisal regulations permit the appraiser to include in the market value estimate any significant financial assistance that would survive sale or foreclosure, such as the value of LIHTC, subsidies, and grants.

An institution should ensure that an appraiser engaged to appraise an affordable housing project is competent to perform such an appraisal; is knowledgeable about the various types of financial assistance and programs that are associated with an affordable housing project; and identifies and considers the effect on value of any significant amount of the financial assistance. Consequently, the appraisal should contain a discussion of the value of the financial assistance that would survive sale or foreclosure and how it effects the market value estimate of the project.  In addition, while certain types of financial assistance such as tenant-based rent subsidies do not necessarily transfer to new ownership upon sale or foreclosure, the lender should ensure that the appraiser appropriately considers the effect of these items in the cash flow analysis, when applicable.


Footnotes

1.  OCC 12 C.F.R. Part 34; FRB 12 C.F.R. Part 225; FDIC 12 C.F.R. Part 323; and OTS 12 C.F.R. Part 564.  Return to text


SR letters | 1995