Tuesday, June 09, 2009
Yesterday's quandary over the value of Supreme Court nominee Sonia Sotomayor's New York apartment gets new context in today's Wall Street Journal report($) on the difficulties currently being encountered in appraising high-end homes.
During the housing boom, appraisers often complained of pressure from lenders to inflate home-value estimates to justify dubious mortgage lending. Now, some people in the mortgage business -- and some borrowers -- say the pendulum has swung too far the other way.We've gone through Oakdale many times over the last couple years while living in Northern California - didn't know they had any Victorian homes there, but it wouldn't be surprising if the assessor had it about right. That is, after all, still part of California's Central Valley, one of the handful of "ground zeros" for the U.S. housing bust.
Patti Sanders, an aerospace engineer in Oakdale, Calif., knew prices were down sharply but said she was "flabbergasted" recently when her 3,100-square-foot Victorian home was appraised at $250,000, compared with $635,000 assayed two years earlier. The new estimate prompted a lender to reject her application for a refinancing that would have lowered her mortgage payments about $400 a month.
Anyway, the lack of sales at the high-end and prices that, in some areas, have remained lofty far longer than anyone could have reasonably expected at this point have all combined to make it exceedingly difficult to value once high-priced homes.
The knowledge that a humongous wave of prime mortgage defaults is now in the pipeline (the "pig in the python", as they say) would make anyone err to the low side these days.
Lenders burned by huge losses from defaults now are pressing appraisers to be more conservative. And appraising itself is more difficult with home prices fluctuating rapidly and transactions few and far between in some markets; sale prices from a few months back may no longer reliably indicate the value of nearby homes.That makes yesterday's valuation disparity look tame by comparison.
Credit lines are also vulnerable. J.P. Morgan Chase & Co. recently froze one customer's home-equity line of credit because, the bank said, his Manhattan apartment -- a 2,650-square-foot three-bedroom, two-bedroom duplex with a terrace appraised at $1.475 million in 2005 -- was worth just $600,000. Chase told the borrower, who asked not to be identified, that the lower credit line would remain in effect until a new appraisal could demonstrate the value was much higher than $600,000.
The borrower then paid for a new appraisal that pegged the property at $1.8 million.
How can banks possibly have any faith in the soundness of their lending when they get two appraisals for the same property where one is three times the other?