The biggest housing boom in history has a number of enabling factors affecting lenders and borrowers. Low interest rates, fewer credit checks for lending, and lots of media reports on the housing gold rush are only a few.
One of the many signs that things are out of whack is the pressure on appraisers to keep raising appraisals - whether they are warranted or not. Expect more stories of how inflated appraisals allowed people to get credit that they could not afford and dont have the collateral to pay off, even in bankruptcy.
New Headache For Homeowners: Inflated Appraisals
Rosy Valuations, Common In Boom, Now Haunt Sellers; 'It's Pay-the-Piper Time'
July 22, 2006
As the housing market cools, Americans are confronting a problem that was easy to ignore during the boom: inflated appraisals of home values.
Critics inside and outside the appraisal business have long warned that many appraisals are unrealistically high. That's partly because generous appraisals help loan officers and mortgage brokers, who often choose the appraiser, complete more deals. If a home is appraised at less than the buyer offered, the deal is likely to fall through.
Inflated appraisals didn't matter much when home prices were rising at double-digit rates, since market values would quickly catch up. Now, however, prices are leveling off in many places and falling in some. Some homeowners are finding that the market value is below what past appraisals led them to believe.
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Appraisals are only opinions, and appraisers often disagree on the value of a home. But wide discrepancies can mean that at least one of the estimates was unrealistic. No one can say how many appraisals are unreliable. Still, Iowa Assistant Attorney General Patrick Madigan, who coordinates with law-enforcement officials from other states on mortgage-related issues, believes the deliberate inflation of appraisals is "widespread" among loans to subprime borrowers, or those with flawed credit histories. Jacquie Doty, an executive at Freddie Mac, a big provider of funding for home mortgages, predicts that inflated appraisals will lead to more foreclosures.
In the 1980s, inflated appraisals were one factor in the loan losses that sank many savings-and-loan institutions that were holding collateral worth less than they believed. Today, most loans are sold to investors and risks are more spread out, making it less likely that poor appraisals would cause lenders to collapse. But many people in the real-estate industry believe the appraisal system is overdue for reform, and investors who buy loans are asking tougher questions about appraisal procedures.
Great article! Well there is one thing I would like to add here is that never buy a loan to renovate your house or for purchasing furnishings. You can go for a top up loan which can cater to these kind of things with just the appropriate interest rates.