We agree that the value of the property in your example would be the purchase price of $50,000, and not the as-completed value of $100,000. We also agree that there do not appear to be any applicable exceptions.

The Interagency Guidelines outlining the calculation and reporting of loan-to-value ratios generally define the property value for a purchase loan as “the lesser of the actual acquisition cost or the estimate of value.” We believe that the property’s “acquisition cost” is the purchase price ($50,000), which should be treated as the property’s value because it is lower than your estimate of the property’s as-completed value ($100,000).

However, you should be able to adjust the loan-to-value calculation after the improvements are completed. The Interagency Guidelines provide that a loan should no longer be reported as exceeding the supervisory loan-to-value limits when an “additional contribution of collateral or equity (e.g. improvements to the real property securing the loan), bring the loan to value ratio into compliance with supervisory limits.” Consequently, if the property is re-appraised after the improvements are completed at a value that places it within your supervisory loan-to-value limits, we believe you would be able to remove it from your exception report.

For resources related to our guidance, please see:

• 12 CFR Part 365, Subpart A, Appendix A, Interagency Guidelines for Real Estate Lending Policies — Loans in Excess of the Supervisory Loan-to-Value Limits (“The agencies recognize that appropriate loan-to-value limits vary not only among categories of real estate loans but also among individual loans. Therefore, it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits, based on the support provided by other credit factors. Such loans should be identified in the institution’s records, and their aggregate amount reported at least quarterly to the institution’s board of directors. (See additional reporting requirements described under ‘Exceptions to the General Policy.’)”)

• 12 CFR Part 365, Subpart A, Appendix A, Interagency Guidelines for Real Estate Lending Policies — Definitions (“Loan-to-value or loan-to-value ratio means the percentage or ratio that is derived at the time of loan origination by dividing an extension of credit by the total value of the property(ies) securing or being improved by the extension of credit plus the amount of any readily marketable collateral and other acceptable collateral that secures the extension of credit. The total amount of all senior liens on or interests in such property(ies) should be included in determining the loan-to-value ratio. When mortgage insurance or collateral is used in the calculation of the loan-to-value ratio, and such credit enhancement is later released or replaced, the loan-to-value ratio should be recalculated.”)
• 12 CFR Part 365, Subpart A, Appendix A, Interagency Guidelines for Real Estate Lending Policies — Definitions (“Value means an opinion or estimate, set forth in an appraisal or evaluation, whichever may be appropriate, of the market value of real property, prepared in accordance with the agency's appraisal regulations and guidance. For loans to purchase an existing property, the term ‘value’ means the lesser of the actual acquisition cost or the estimate of value.”)

• 12 CFR Part 365, Subpart A, Appendix A, Interagency Guidelines for Real Estate Lending Policies — Loans in Excess of the Supervisory Loan-to-Value Limits (“[A] loan should no longer be reported to the directors as part of aggregate totals when reduction in principal or senior liens, or additional contribution of collateral or equity (e.g., improvements to the real property securing the loan), bring the loan-to-value ratio into compliance with supervisory limits.”)