I just returned from attending and speaking at my third distressed asset conference in as many months. Again my number one take away from the conference by bankers and investors alike is that “no one” holds any stock or value in today’s real estate appraisals. Banks still contend they need them to appease regulators but for the most part they believe that the appraisals are grossly “overvalued” except when they are grossly “undervalued.”
The reason no one can believe appraisals today is that there is no mechanism in place that can accurately track loan sales results. Loans are typically sold at a discount to the unpaid principal balance and today that percentage is significantly less than Par. The only “recorded” information upon the sale and transfer of a loan sale is the Assignment of Note or Mortgage. That Assignment refers only to the "original" Note amount and has no reference to the purchase price of the Note. As a result there is no way for a third party to determine the sales price and no way for appraisers to gauge collateral value based on comparable sales.
For a variety of reasons lenders are not going to voluntarily publicize the loan sales results and they typically are not going to allow their loan sale advisors to publish sales results. Loan buyers have no incentive to publish what they paid for the loan for several reasons, one being the obvious reason that if borrowers knew what type of discount the investor/buyer received that they would in turn expect a discounted payoff.
Unbelievably there are a few national advisory firms advertising that they have the ability to accurately gauge the value of the CMBS market and have the ability to gauge the depth and breadth of the entire loan sales market. My response to their claims is “prove it.” I am confident that they cannot. Loan sales are announced every day that only advertise the aggregate amount being offered for sale. There is no mention of the seller, the identity of the loans or the identity of the collateral, in short results are untraceable. Further there is never a follow on announcement of the sale results, how many loans actually sold, if any, or at what price. So how are these firms coming up with these magic numbers?
Don’t stop reading now, it gets even more bizarre. Today’s headline in American Banker reads “Four States Weigh Bills to Make Appraisers Disregard Foreclosures.” The article says “Four states are considering legislation that would prohibit or restrict appraisers from using distressed sales, such as those of foreclosed properties, as comparable sales when assessing the value of a home.” “The rationale for the bills in Illinois, Nevada, Missouri and Maryland is that the prevalence of foreclosures and short sales — almost four out of 10 sales in the country are distressed — is distorting the markets.”
Welcome to the Twilight Zone of real estate lending and investing 2011.
Comments