Report from the Real Estate Front: Appraiser Calls Increasing; Banks Worry About Losses

Lately I have been receiving a high volume of calls from appraisers.

Appraiser calls are nothing new. Normally, I receive a handful a month calling to ask questions about properties I have sold or asking for my opinion on a particular property they are trying to value. Now, I am receiving several appraisal calls per week.

I always ask the appraiser what the purpose of their appraisal is (sale, refinance, estate planning, etc.). The answer has almost always been one of those I just mentioned. Now, appraisers are almost exclusively doing valuation updates for the banks holding the debt on the property being appraised. I understand that there are regulatory reasons for these updates, but either the banks were not following these regulations in the past, I wasn’t getting called or the banks are starting to become very concerned about the rapid deterioration in valuation of their collateral.

I don’t know what good it does to spend thousands of dollars per property for a report to confirm that the collateral is worth 50% less today than it was when the bank funded the loans. I wonder what the banks are doing with this information.

We are only at the very beginning of the meltdown in CRE for investment properties. As more and more “distressed” properties hit the market and are purchased, downward pressure will be put on other properties in the form of lower asking and effective rents and higher CAP rates, possibly resulting in a second wave of defaults and foreclosures.

So much for the “V” shaped recovery. Bring on the “W”.

Comments

[Tony Petroski:]

Mr. Rodriguez. We probably will have a W-shaped recovery. I've been calling for an ampersand recovery but to date nobody else is doing the same. In any case, your concern over appraisals isn't new and therefore probably won't affect the recovery.

Oct 02 09:47 AM

[totheabovej...:]

i see a huge shift of the deleveraging moves protecting most of the economy from a major meltdown due to the CRE abyss.

Before everyone was caught with their pants down.. now many banks are shaping up any way they can.

i still worry about the CDS, CDO markets though. Those are bets against planned failure.

Oct 02 11:49 AM

[Tack:]

The CRE lenders have aggressively sold assets, paid down debt, extended maturities and built reserves. And, CRE defaults are only at a garden-variety 2.8%, currently, although some say we "may" hit 4% by year end. None of this is earthshaking.

However, many CRE lenders have seen their share prices decline 75-90%, so, contrary to being highly vulnerable, these companies may be nice buys at current prices. Some of their related preferred shares may be even better investments because they, too have been depreciated 40-70%, are paying above-normal yields and are not very susceptible to dividend deferrals and completely immune to dividend cuts.

Oct 02 03:04 PM

[Tobby:]

$1,000s of dollars per property for a report...

Those appraisers would be lucky to get $200 for a forensic drive-by appraisal. Many of these appraisals are required for the banks to do their NPV analysis on defaulting loans. Some are foreclosures in progress. A chunk are PMI companies trying to put the loan back on the lender. These appraisals are retrospective in that they look at the value back when the loans was made.

Your conclusions are correct though. A tsunami of depreciating housing inventory in the bubble and near-bubble states.

Oct 02 03:16 PM

[Scrutinizer:]

I'm curious about how CRE loans are registered. Is it similar to residential mortgages using MERS?

If so, what potential issues exist for CMBS (and RMBS) given the recent Kansas Supreme Court ruling related to MERS having no standing as a party to the foreclosure process?

www.msfraud.org/Kansas...

iamfacingforeclosure.c.../

Seems to me that if this issue gains legal traction, there will be trillions of dollars worth of mortgage loans (residential and commercial) that will require legal resolutions by the courts, not the markets.

Scrutinizer

Oct 03 12:59 PM

[investorinPA:]

Another prescient article on appraisals and what its doing to home sales:

contraryriches.blogspo...

Oct 03 06:02 PM

[meridian575:]

Great article. Yahoo Finance has a read on the impending Bank failures to come. Take a look at the jump:
finance.yahoo.com/news...

Oct 06 11:16 AM