KRETS File Number s1

REAL ESTATE APPRAISAL REVIEW DOCUMENT

KRETS File Number: / KEYW-090324-8745-1
Property Name/Description: / Frontier – Sage Pointe II / 58 remaining near finished lots
Property Location: / South of Muscatel Street and west of Escondido Avenue, about 1 mile east of IH 15, Hesperia, San Bernardino County, CA
Relationship Manager (review client): / Aram Poladian
Borrower's Name: / OREO Corp. – Bank Group owned asset
Intended Use of Review Document: / Support KeyBank transaction underwriting
Intended User(s) of Review: / Internal Bank Client
Purpose of Review Assignment: / Determine reasonableness of market value estimates and regulatory compliance of appraisal
Appraisal Firm: / Michael Frauenthal & Associates, Inc.
Appraiser Responsible: / Scott Peterson
Legal Interest Appraised: / Fee Simple
Appraisal – Date of Report: / April 27, 2009
Reviewed By/Effective Date of Review: / Marcella N. Pardo, MAI / June 11, 2009
Appraisal Type: / Complete /

X

/ Limited
Appraisal Report Type: / Self-Contained / / Summary / X
Market Value Conclusions /

Effective Date

/ Market ValueAs Submitted /

Market Value

As Adopted

Market Value As Is on Appraisal Date: / 4/15/09 / $530,000 / $530,000
Disposition Value on Appraisal Date*: / 4/15/09 / $450,000 / $450,000

*Disposition Value, as defined by the client, is a limited marketing period equal to a six month marketing period associated with the market value conclusion.

APPRAISAL OPINION RATING

/ Excellent / Good / Avg. / Below Avg. /

Poor

1 / 2 / 3 / 4 / 5
Completeness of the report: / X /
Adequacy and relevance of the data, and propriety of any adjustments to the data: / X
Appropriate appraisal methods & techniques: / X
Analysis, opinions & conclusions appropriate, & reasonable: / X
Overall Appraisal Quality Rating / / X
Yes / No
Market Value Conclusion Reasonable / X
RECOMMENDATION: / Adopt / Adopt as modified by appraiser / Adopt as modified by reviewer / REJECT
X

SCOPE OF WORK

In compliance with the Uniform Standards of Professional Appraisal Practice (USPAP, Standards Rule 3), the following disclosure is made concerning the nature, extent, and detail of the review process conducted regarding the appraisal identified within the attached review document, and the reporting of the results of the appraisal review.

STANDARD SCOPE OF WORK

Unless otherwise stated herein, this review is limited to a desk review, which is completed without a field inspection of either the subject property or the comparable properties and is limited by the data presented in the report. The appraiser’s methodology and techniques are reviewed for appropriateness and calculations are checked. In addition, data in the report is checked for consistency and that the appraisal was completed in accordance with the Bank's guidelines, Title XI of FIRREA, and USPAP. The opinions and conclusions of the review are summarized in the attached "Real Estate Appraisal Review Document.

EXTRAORDINARY ASSUMPTIONS OF REVIEW

Unless stated otherwise in the following Expanded Scope Of Work section, the analyses, opinions, and conclusions in this review are based solely on the data, analyses, and conclusions contained in the appraisal report under review.

It is an Extraordinary Assumption of this review that the data in the appraisal report is representative of existing market data. No attempt has been made to obtain additional market data for this review. Unless otherwise indicated in the Certification, I have not personally inspected the subject property or comparable market data. Furthermore, I have not independently researched or verified the data supplied by the appraiser within the report.
All items in the work under review that the reviewer concludes are credible and in compliance with the applicable USPAP Development Standards are extended to the reviewer’s development process in this appraisal review document on the basis of an Extraordinary Assumption.

EXPANDED SCOPE OF WORK

None noted.

REVIEW COMMENTS:

The subject consists of 58 near-finished remaining lots in the Sage Pointe II subdivision. Recent data paints a weak picture of the regional and local housing markets. Prices continue to decline, pushed lower by competition from foreclosures, short sales, and by buyer’s fears and difficulty qualifying for loans. Very high foreclosure rates continue to drive home prices downward.

Builders who purchased land during the peak markets years of 2005 and 2006 cannot build profitably at today’s prices and many are choosing to mothball their projects or simply walk away. As a result, lots are selling at a fraction of the original price. With their lower cost basis, the new builders will be able to undercut existing projects, pushing additional developments into foreclosure. Until the inventories of distressed lots and homes are depleted, recovery is unlikely. The appraiser reports that most experts believe the market will remain depressed through at least 2009 and likely well into 2010.

The subject property was previously appraised by Scott Peterson in August 2008. The as is market and disposition values (deemed to be the same at that time) were $670,000. The current appraised market and disposition values mirror the continued decline in values and reflect the extended marketing time due to additional inventory available for sale in the subject market.

Strengths:

· Remaining costs to finish the lots is considered minor at $1,000 to $2,000 per lot

· The subject high desert area rates the highest affordability index in the state at 83%, with an entry level home priced at $103,220

Weaknesses:

· No sales/closings of finished/near finished lots in the high desert since October 2008

· Weak economic conditions

· As more banks foreclose on lots, supply is continuing to increase

Overall Near-Term Market Trends for Subject Property Type
Improving Market Trends
Stable Market Conditions
Cautionary Concerns are Present
X / Deteriorating Market Trends

The success of the subject sub-market is largely tied to the larger macro market, therefore until regional downward trends reverse; the subject sub market is vulnerable to further deterioration. Until then, value pricing and the ability of buyers to secure financing is paramount in generating sales.

REVIEW CONCLUSION:

The market overview presented was as of 4th quarter 2008 and considered dated. The appraiser was asked to update the information to 1st quarter 2009. Further detail was requested regarding community facility district (CFD) taxes and whether the assessment directly applies to the subject lots. Lastly, various minor inconsistencies were noted and remedied as well. The appraiser provided a revised pdf incorporating the review comments, with no value change.

Overall, the review notes that the value opinions stated in the report under review were developed in compliance with applicable standards and requirements. The value conclusions are appropriate and reasonable given the data and analysis presented. The KRETS Reviewer has adopted the report and the value conclusions as outlined on Page 1 of this Real Estate Appraisal Review Document for lending purposes.

USPAP STANDARDS RULE 2-2 COMPLIANCE SUMMARY
/ SR # /

Page #

1 / Does the appraiser state the identity of the Client and Intended User(s)? / 2-2 a/b (i) / 2
2 / Does the appraiser state the intended use of the appraisal? / 2-2 a/b (ii) / 2
3 / Does the appraiser sufficiently identify the real estate involved in the appraisal, including the physical and economic property characteristics relevant to the assignment? / 2-2 a/b (iii) / i-iii
4 / Does the appraiser state the real property interest appraised? / 2-2 a/b (iv) / 3
5 / Does the appraiser state the type and definition of value and cite the source of the definition? / 2-2 a/b (v) / 3
6a / Does the appraiser state the Date of the Report? / 2-2 a/b (vi) / 2
6b / Does the appraiser state the Effective Date of the Appraisal? / 2-2 a/b (vi) / 2
7 / Does the appraiser state the Scope of Work used to develop the appraisal, including a description of the extent of collecting, confirming and reporting data? / 2-2 a/b (vii) / 2
8 / Does the appraiser discuss the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analysis, opinions, and conclusions; exclusion of the sales comparison, cost approach, or income approach must be explained? / 2-2 a/b (viii) / 66
9a / Does the appraiser state the use of the real estate existing as of the date of value? / 2-2 a/b (ix) / 46-52
9b / Does the appraiser discuss the use of the real estate reflected in the appraisal? / 2-2 a/b (ix) / 46-52
9c / Is the appraiser’s rationale for the opinion of highest and best use discussed? / 2-2 a/b (ix) / 63-64
10a / Are Extraordinary Assumptions and/or Hypothetical Conditions disclosed in a clear and conspicuous manner? / 2-2 a/b (x) / 7-8
10b / Does the appraiser state that the use of Extraordinary Assumptions and/or Hypothetical Conditions might have affected the assignment results? / 2-2 a/b (x) / 7-8
11 / Is there a signed certificate in accordance with SR 2-3? / 2-2 a/b (xi) / Addenda

Comments:

INTRODUCTION & FACTUAL DESCRIPTIONS /

Y

N

NA

12 / Is the subject sufficiently identified (street address, legal description, assessor’s parcel number, tax id number, etc)? / X
13 / Does the appraiser state the date of inspection? / X
14 / If applicable, are retrospective and prospective values properly identified per USPAP? / X
15 / Is a statement of ownership history of the subject provided, and is any listing, option, or pending contract revealed and discussed? / X