Saturday, July 22, 2006

Inflated appraisals? Say it ain't so!

The Wall Street Journal has finally figured out (sorry, it's behind a subscription wall) what some of us have known for months -- that one of the contributing factors to the housing bubble is the inflated house values that appraisers willingly furnish to lenders.

Addison Wiggin laid out the scenario very nicely nearly a year ago at the Daily Reckoning:

Lenders, always looking for profits from new loans and from refinancing, hire appraisers to look at properties. If the lender wants to write the loan, you can be sure the appraisal will come out at the level the bank wants, unless claimed value is simply so out of line that the appraiser can't force the numbers.

But appraisers who are paid by lenders understand the game. If banks want to aggressively write mortgages, appraisers will play along.
It's swell for the WSJ reporters to find a good real-person story to illustrate the problem -- a woman in the suburbs of Detroit who refinanced her house and now finds herself owing more than the house is actually worth. But it would have been better for the WSJ (and the financial media in general) to point out these pitfalls before people started falling in.

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