Appraisal Angst

During the height of the housing boom, appraisals became something of a joke. It was not at all unusual for a mortgage loan broker to call several appraisers until he or she found one that would deliver the value "needed" to close the deal. The meltdown exposed just how wildly overvalued many houses had been and the inevitable pendulum swing to stricter appraisal standards occurred. An article in the New York Times about the problems that stricter appraisal standards are causing reveals a certain sense of denial that I see and hear frequently from real estate professionals as well as the general public.

The article points out that lenders are scrutinizing appraisals and kicking back or flat cutting appraised values when they don't agree with the valuation presented by the appraiser. Pretty standard stuff but what struck me was the degree of seeming displeasure with the new order. Consider these comments:

“A house is only worth what the bank says,” said Terry Hastings, a partner at Hamilton Mortgage, in Ridgefield. “It’s not worth what the buyer says anymore.”

“The banks are much less willing to make any exceptions at all,” said Bob Grace, a broker with Anchor Mortgage, in Westport. “They are looking for ways to squash a deal, as opposed to finding a way to make it work.”

“You have banks that know what’s going on and accept it,” said Chris Downey, managing partner at Redding Appraisal Group, “and you have banks that are a little ridiculous.”

Worse, sometimes the only available comps include a foreclosure or a short sale. Because such properties typically sell below market rates, they can drag down a neighboring house’s perceived value.

I particularly like the last excerpt concerning the affect of a foreclosure sale dragging down the perceived value. I think that says an enormous amount about the state of denial that many are in concerning home values. But the larger point is that there is, at least to me, a sense of yearning for the good old days in these comments. More to the point, and this is drawn from other experiences not just from this article, there appears to be a feeling that we will go back to the way things were once this little crisis passes.

I've had numerous conversations with others concerning things like 100% mortgages, home equity lines of credit, no income verification loans and on and on. Generally, the thesis that I hear is that these will be back, often from those shut out of the process now because they need these products to buy a house. Not only is there an absence of recognition that to a large extent these type of lending practices ignited the bonfire but a sometimes vocalized belief that there is nothing toxic or dangerous about them.

I would tend to dismiss this as somewhat typical of human nature, but I wonder if people may have gotten so hooked on easy credit that they might demand its return. If so, and if that dependency is widespread then we might see a rerun sooner than we expect. The political class does not do well in denying this sort of thing to the general populace and might well go back down the road if votes are to be garnered.

Tom Lindmark