Tuesday, January 31, 2012

Are Lenders Overestimating Property Values Prior to Foreclosure?

Over at The Conglomerate, Tom Fitzpatrick has a post that may catch the eye of PropertyProfs with an interest in Real Estate Transactions.  Fitzpatrick explains that banks seem to be systematically overvaluing property values prior to foreclosure sales in weak markets:

Methods used to value property just don’t work well in weak submarkets, and lenders’ valuation models are not correcting for that. It is not hard to imagine that a walk-around appraisal is a reasonably accurate way to value most property in most markets. If brokers want to find non-foreclosure sales to use as comparables, they have to reach back further in time in weak markets than they do in others, so the prices they use are more likely to be stale. Walk-around appraisals may also miss interior damage(stripped copper pipe and wire, appliances, etc.) that properties are more likely to have suffered in weak markets.

Fitzpatrick then highlights the damage that overvaluation is causing in communities around the country. Overestimating property values causes banks to set foreclosure auction reserve prices artificially high,  which in turn leads to fewer sales to homebuyers.  The bank ends up stuck with the property and has few incentives to take care of it, decreasing the value of neighboring land.  

Steve Clowney


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And while you are at it, you might want to check out some of Tom's other published work. He is a rising star in the Federal Reserve Bank in Cleveland and is producing highly regarded research on housing and community development issues. http://www.clevelandfed.org/Research/economists/fitzpatrick/index.cfm

Posted by: Kermit Lind | Feb 1, 2012 6:23:23 PM

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