"Drive-By" Valuations Worry Australian Regulator
The Australian reports that appraisals and lending standards are under review in that country as well. "The nation's banking regulator has warned home lenders that their cutting corners on property valuations could expose them to unacceptable levels of bad debt in a major downturn."
"In some cases, banks are using cheaper, 'drive-by' valuations with no internal inspection, or even a 'desk-top' approach involving statistical analysis and comparative prices in the same suburb. An APRA survey of 96 lenders who control the $500billion mortgage market found that some lenders physically inspected fewer than half of the properties they used as security for loans."
"Ian Herriott, 'There are many lenders relying on computers to do their credit analysis, and in a falling market it's a recipe for disaster.' Property prices have been under pressure since last year when the housing bubble began to deflate. Investment bank JP Morgan said earlier this month that prices could fall by as much as 10 per cent over the next 12 months, even without a further rise in rates."
9 Comments:
"There are many lenders relying on computers to do their credit analysis"
The next wave of outsourcing to India?
On the front page of today's Wall Street Journal there is an article about how much debt people are taking on to buy real estate. It's an interesting and scary article. It makes me wonder where all of this is headed.
JLP
AllThingsFinancial
On the significantly less useful but entertaining WSJ RE bubble discussion there is the a common refrain that appraisal fraud is just sour grapes from appraisers being replaced by computer/statistical analysis.
I would like to hear what this board has to say about that.
Personally, I don't think that RE in which every sale is different is a good match for computerized appraisals.
("Ian Herriott, 'There are many lenders relying on computers to do their credit analysis, and in a falling market it's a recipe for disaster.')
When this thing cracks, we'll just blame it on the computers. I don't know why the banks even bother with the pretense of appraisal. A home is worth whatever someone will pay for it.
Most of this nonsense is due to the emergence of faith in credit scoring---the numerical representation of how well someone has historically paid his or her debts. But most of the credit scoring is used to evaluate unsecured debt, not debt associated with an asset or collateral. So using credit scoring as a way to approve something like a home mortgage is absurd.
I have a friend who was approved last year for a $300K no-down, no-doc mortgage for an "investment" property that threw off negative cash flow.
She has no assets and only worked part-time making less than $30K a year. She was told to write down $65K as income to "qualify" because "they don't check". She got laid off three months later and now scrapes by on dogsitting gigs and such.
But her credit scores were excellent. That's because she has no debt. She has a couple of credit cards with $5K limits and rarely runs up more than $500 or $1000. The reason she doesn't run up balances is because she has no money to pay them off with. So here's an example of someone who is technically broke but has good credit.
Would you lend this person $300K for a negative cash flow investment property? The bank doesn't know that she only makes $25K. The bank doesn't know that she isn't working right now. The bank doesn't know that the collateral is throwing off negative cash flow. Why don't they know? Because they don't check. They just looked at her credit score and said, "Looks good to us."
My dog has no debts, has never failed to pay a bill on time. That's because he has no money and has never had to pay a bill. Would you lend my dog $300K because he has a pristine credit history?
Doglover:
You mention how the banks have a don't check/don't care policy. Isn't that because they can sell the loans to Fannie/Freddie. And do the stockholders of those two keep the price as high as it is becasue they are sure that they will recieve a non stop stream of liquidity?
And, can your dog sign his/her name?
I dont know about Australia, but here in brooklyn they still do physical inspections. I'm currently in the process of refinancing a 4 family brownstone in Bubblicious Brooklyn. Today they appraiser came to my home. He took pictures of house front and back. Pictures of boiler, utility meters(verified that 4 seperate meters). Pictures of all bathrooms and kitchens(every apartment). Pictures of detailed architecture.
When asked why the detailed inspection, he cited the high appraisal price($1.75 mill) and the desire of the bank to document the items that homeowner generally use cashout proceeds for.
BTW, it's a 'liars loan' being funded through IndyMac
I know that at least in the late '80s, there were provisions in FNMA/FHLMC secondary mortgage contracts that required the loan originator to repurchase the loan from the secondary purchaser if it turned out that there were misrepresentations made in connection with originating the loan. Is anyone familiar enough with the GSEs' standard contracts to know whether this is still the case?
If it is, then mortgage originators aren't as off the hook for bad loans as they are being said to be as a result of the widespread sale of loans into the secondary market.
Thomas -- good observation, assuming it's correct.
I took out a HELOC on my condo two months ago, when I wanted to buy a replacement home and hoped to do so for cash. My Experian score is 838, based not on no debt but on having repaid many types of loans always, and on time. This has been consistent over a period of almost 40 years, though I doubt they go back anywhere near that long in their credit search.
They sent an appraiser to inspect our condo. Now, a condo in this area is almost a piece of meat. There are well-known floor plans and most local folks know the reputation of each complex. But this guy wanted to come in and look all around. Didn't bother me, though his appraisal was noticeably lower than my Realtor wife thought it should be based on comp sales. Nevertheless, we did not complain, took what they offered and modified our strategy. The lender is a large national bank and I credit the appraiser with being cautious on his client's behalf. At least this one bank is proceding with due care.
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