As I have made clear on this blog, I am a residential real estate appraiser/agent. In addition to appraising real estate, I also have had the opportunity to travel all over the country in recent years and teach educational seminars to appraisers.
One of the great benefits of my teaching experience has been the opportunity to visit with appraisers in markets very different from my own. But you know what I have discovered…although individual real estate markets truly are unique, there is also a sense in which they are just like each other. What I mean is this: all over the country, in communities as diverse as they could possibly be from each other, there is one phenomenon that is present in each of these U.S. real estate markets…properties have been “over-appraised” for years! Now, that is not to say that all appraisers are fabricating “values” in appraisals. But, I challenge anyone to show me a market where this is not happening on a daily basis, and in a big way.
That is the dirty little secret that gets lost in all the noise about the borrowers that are defaulting and the lenders that are foreclosing. For many of these properties that the lender will eventually take back, not only is the lender going to be faced with a weakening real estate market as they try to sell the property (which further weakens the market I should add), unfortunately lenders will also find that the property was never worth what the appraiser said it was.
It gets better, or worse, I should say. Right now lenders are getting hammered because of the subprime/default/foreclosure mess, but this dirty little secret points to another chink in the lenders armor which has not even been probed yet: many, MANY, of the performing loans (the ones where the borrowers are paying their notes) are also based on inflated appraisals, which means the collateral value of lender’s loan portfolios are overstated! Overstated by how much? Nobody has a clue, and the lenders probably don’t want to know. As long as the performing loans continue to perform, maybe this is no big deal, unless investors decide they actually do care about mundane, troublesome details such as the true collateral value of loan portfolios, upon which Mortgage Backed Securities and Collateralized Debt Obligations depend.
How do I know this? Where is the evidence? Every appraiser in the United States knows this is true. Ask one. If he’s honest, he will tell you I am dead-on right about this.
Oh yeah, I’m not just talking about subprime loans. Inflated appraisals can be found in loan files of all types and amounts.
Bottom line…the lending situation is worse than the numbers indicate.