Addressing Real Estate Portfolio Risk

by Richard Gabrielson

Here’s how to monitor collateral threats and credit quality deterioration

In the two years since interagency and NCUA guidance on managing real estate portfolio risk were issued, some credit unions still do not have sufficient programs and policies in place to address real estate portfolio risk. As a result, they are receiving “document of resolution” comments in their examinations, deficiency comments in external audits or, worse yet, news that they need to make financial statement adjustments after year end.

Specifically, the guidance at hand includes The Interagency Appraisal and Evaluation Guidelines that were released on Dec. 2, 2010, by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration. Needless to say, these federal agencies concur as to the significance of the guidance.

And secondly, in December 2010, NCUA Letter 10-CU-23 referenced the interagency guidance, and emphasized the critical role valuation plays in estimating loss exposures for real estate loans and the importance of appraisal and evaluation programs in credit union lending. It encouraged credit union boards to develop and maintain robust policies and procedures for all real estate transactions, whether the real estate is owned by the credit union or the assets are intended for sale.

Among other requirements, the Interagency Appraisal and Evaluation Guidelines state that credit unions must have:

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