More Banks Consider Property Assessments

Property Condition Assessments ("PCAs") have been widely recognized and used by HUD, Fannie Mae, Freddie Mac and most lenders using loans to create mortgage-backed securities. Seen as a crucial factor in assuring that the underlying security is adequately maintained, PCAs are used to establish reserve amounts sufficient to maintain the property in its current market position, identify areas of deferred maintenance (a.k.a. immediate needs), and compliance with local building and fire codes as well as regulations such as the Americans with Disabilities Act (ADA).

Banks traditionally have not required such reports, relying on the fact that the majority of their loans had full recourse to the borrower. However, banks have recently discovered many advantages for the inclusion of a PCA as part of the underwriting process.

One advantage the PCA provides is a detailed evaluation of the loan security, answering such questions as "Are their major foundation or structural issues?" or "Has the borrower been maintaining the property or simply pulling cash out?" Another advantage is the report establishes minimum reserve levels that assure the property will either be maintained in an operating condition or monies will be available to the bank to return it to an operating condition should it need to foreclose. While the bank theoretically has full recourse on the loan, it is easier utilizing an existing reserve, than starting legal proceedings in the hope the borrower has sufficient assets to fulfill the loan agreement. Another major advantage of establishing the reserves is the loan is structured in a manner that makes it more easily transferred to a securitized lender. This provides the bank the flexibility of an exit position. And finally, the process of collecting and managing the reserve accounts provides an additional fee service for the bank. Many banks are coming to the conclusion that these advantages far outweigh the cost of the assessment, which is usually covered by the borrower as part of the loan application costs.

Back to our website