Having been in the real estate industry for many years I am no stranger to the relationship of a real estate appraisal and how much a bank would be willing to lend on real estate. In today's lending environment banks are concerned more than ever about the "Loan to Value" or LTV they are lending on.
In years past, banks were lending on appraised values that everyone knew were over inflated. And yet lend they did by the billions. It made no sense whatsoever and anyone who really understood real estate watched in disbelief, if not in shock at the loans made. Of course we now know that everyone is paying the price for taking an appraisal at face value even when good judgment tells you otherwise. Have the banks learned from this? Judging from recent experiences, NO!
A few loans I have been involved with only show banks have simply reversed the pendulum. Just as they relied exclusively in the past on appraisals for LTV, they continue to do so today except, towards the other extreme. The problem is that the appraisals are being made based on market values for a given type of real estate in a given area. That sounds logical but is it real?
In a market where foreclosures and short sales are common place, is it really fair to value a piece of real estate in comparison to another sold entirely in distress? My answer would be, not always! The banks claim; why shouldn't they rely on the appraisal if another buyer can buy very similar real estate at a much lower price? Although that may be true of a "purchase", in cases were a "refinance" is being made, the situation is different. Is the borrower in distress? Is the cash flow and ability to repay good? Does the borrower have a good credit rating? Does the debt to income ratio fall in line with lending policy?
When the bank has a refinance that is all positive and there is a slight difference between appraised value and the amount of the outstanding loan the bank should commit to renewing the loan even if the LTV is slightly off. Why? Because it is good business and economic sense. There is no doubt in my mind banks have an important role to play in stabilizing real estate values. Latitude in this area truly improves overall real estate values and it rewards consumers who have been responsible and simply have been caught in what everyone knows will be a temporary market fluctuation.
Instead banks lend a blind eye to circumstances, force existing borrowers to fork-over additional cash to bring the LTV into the banks guidelines. This leaves a bad taste in the consumers mouth, slows economic recovery and continues the decline in real estate values in a given market.
The current climate in bank lending really is a form of economic "redlining". It is a policy that says, we know you are a good borrower, you have the cash, the repayment ability but, since other people in your neighborhood were less frugal, took big risks and overleveraged themselves we refuse to lend to you based on the fact your neighbors don't have the right financial color.
Are these the same banks that took our tax dollars? Is this legal? Are the appraisals rigged to recapitalize banks? Who's looking at this?
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