Banks Worsening Foreclosure Crisis By Overvaluing Homes: Study

Banks might be indulging a bad habit that could be worsening the foreclosure crisis, according to recent research from economists at the Federal Reserve Bank of Cleveland.

The economists, Thomas Fitzpatrick and Stephan Whitaker, did some analysis of the Ohio real estate market and found a disquieting trend. Banks seem to be over-valuing many of the homes they foreclose on, making it less likely that homeowners can get a loan modification and more likely that they'll end up losing their property.

It's not clear how or why banks are getting an inflated idea of the value of so many properties -- especially since foreclosed homes tend to drag down real estate prices for the whole neighborhood -- but the trend seems to be real. Fitzpatrick and Whitaker note that at foreclosed-home auctions in the Cleveland area, banks routinely sell their properties for much less than what they paid to buy them from the sheriff, meaning banks are high-balling their estimates of what those homes are worth.

If they weren't doing that, the economists write, then maybe they'd be more willing to extend loan modifications to Ohio homeowners who then wouldn't have to give up their houses.

This isn't the first evidence that banks have made the foreclosure crisis more pronounced. The widespread practice of robo-signing -- banks moving forward with foreclosures based on forged or unread paperwork -- has significantly impeded the housing recovery. And additional signs have shown wrongful foreclosures continue to be a problem across the nation.

Today, the foreclosure crisis remains a major source of economic distress in America, and the sheer volume of foreclosed properties is expected to get worse before it gets better, thanks to the recent $25 billion settlement between 49 states and five of the country's biggest banks.

Meanwhile, as more and more people bail out of the housing market and flee to rental units, the nation's low-income earners -- many of whom never had the option of buying a house, and depend on affordable apartments for shelter -- are finding themselves priced out of places to live.

Besides delaying a recovery in housing prices -- seen as a prerequisite for any broader economic turnaround -- the foreclosure epidemic has also been characterized as a public health crisis, with research linking the financial and psychological stress of foreclosure to widespread incidences of depression, anxiety and an inability to afford food and medicine.

Comments

[Caroline Barwick]

12:12 PM on 06/04/2012

My home was definitely overvalued at outset making it impossible to sell without a shortfall. Being misled about the equity prevented my husbandfrom completing our new home and finishing a building project. This is turn led to the loss of our home, my husband's livelihood and our finacial future yet I am told there is nothing, in law, I can do about it as it to remote to make the bankers accountable. There remains no incentive for them to behave any differently and for this reason the individual continues to pay the price. http://lifeafterdebts.blogspot.co.uk/2012/03/plato-once-said-good-people-do-not-need.html

[anonymous67]

06:40 PM on 03/20/2012

This is because the Department of Treasury is still allowing banks to lie about loan values. This was done by suspending requirements that banks carry loans at market value i.e. mark-to-market. Banks therefore continue to account for loan portfolios at greatly inflated values. When they foreclose, they collect massive fees and write off the loss off of their taxes.

The truth is that if our government had not been corrupted and still required banks to show loans at market value, most of the Wall Street banks would be insolvent.

America, wake up! Your government is corrupt.

[robbyr2]

10:23 AM on 03/20/2012

Sure not happening here where I live. Houses are on the market (for a short time) listed by the banks at 40% of the original price and tens of thousands less than non-distressed homes go for.
While the writer appears to think this behavior on the part of the banks is a good thing, he is encouraging the banksters to drag the middle class even lower. If the banksters could not sell the home at less than 80% of the original loan value, there would be very few foreclosures. There would be a lot of homes being rented to the people who used to own them. As long as there was a way back, those homes would be in better shape in a year than they are now. And their neighbors wouldn't lose everything they worked for.

[Stacy M]

09:52 PM on 03/19/2012

I think this is the banks way of cooking the books.The high price of foreclosed homes must look good in their books, or at the very least, lets someone cover their behinds.

[Julie Baker Morse]

12:45 AM on 03/20/2012

Large tax deductions for supposed "losses", perhaps?

[takebackcontrol]

08:28 PM on 03/19/2012

The reason this is happening is that banks hire brokers to do what is called a BPO and they are usually struggling real estate agents. They want to keep getting phone calls from the bank so they come in "High" with the value and then the banks like them because the net loss doesn’t seem so bad...The exact opposite happens in a refinance or purchase because of HVCC (Sen. Schumer bill) that makes appraisers get paid less money and they are more on the hook. Human nature plays a huge part because the appraiser will bring it in the value super low so as not to scare the new bank making a loan and thus they will get more jobs. If you really want to make a difference in your area then tell your local congress person that you dont like HVCC/Frank Dodd. I can promise you that both those bills hurt all Americans when it comes to mortgages and real estate prices. Here is an idea...lets hold those homeowners (who cry wolf about being foreclosed on) accountable for refinancing their home umpteenth times and ask them where the money went. Maybe if the news would do a little more research they would find these people got more out the banks and your tax dollars than the bank got out of them. Get real Americans and admit we don’t know how to manage our money and we are teaching our kids the same bad habits.

[Jackandcoke]

01:27 PM on 03/19/2012

They are bilking the Feds for it via tax write-offs. One of the many games the wealthy play on our system.

[JoAnn Kennedy]

12:45 PM on 03/19/2012

I guess HARP and that 25 billion settlement did wonders to get the financial economy back on the financial fast track to health and wealth NOT!!! It seems to me the more banD(k) aids we give these TBTF shysters the more the crisis worsens. OKAY DC stop going around the same mountain and doing the same thing -- it ain't working -- It's dysfunctional to do the same thing over and over again and expect different results. The banksters are criminals -- put them in behind bars, and not Camp Cupcake -- Rikers Island is more suitable for the likes of these snakes

[MilesToGo]

11:29 AM on 03/19/2012

Of course banks are over-valuing the properties, no surprise at all. That they might be hurting even their own interests as a consequence never enters their narrowed, greedy consciousness. The solution is simple. Banks should be compelled by law to use certified independent appraisers. This would even open up some jobs for unemployed real estate agents.

[jangoodell]

01:04 PM on 03/19/2012

No real estate agents--inflated prices benefit them. But I do think appraisals should only be done by independent appraisers.

[MilesToGo]

01:31 PM on 03/19/2012

Good point, of course. But it seems most independent appraisers arise from having been in the real estate business or one of its ancillary trades. The issue is one of determining value using ethical and moral metrics.

[WashingtonDCsucks]

11:02 AM on 03/19/2012

Banks are a clear and present danger to the USA and the American people.

They have already stolen Trillions of dollars forget the little paltry official sums, look how badly managed that is, then multiply it by billions behind the scenes.

Since corporations are people now...... we can start the treason trials.... banks always play both side of every conflict so they are an easy conviction.

[MSROADKILL612]

09:37 AM on 03/19/2012

My 2c

The bigger loans down the track thing seems fanciful.

the big issue is to hide their losses on their books. Rather a non sale than one that reveals how overstated their books are.

The bailout gave them the deep pockets to wait with their fingers crossed.

Thats why mainstreet cant get loans. all their cash is tied up in this destructive exercise.

The real crunch will come when they try to rent these properties based on their deemed values.

My guess is they are giving sweetheart loans to connected investors who buy at inflated prices, to prop the market to hide their true losses.

Or.. - we will knock $100k off your bank fees if u pay $100k too much for a house

They really should have nationalised it when they had a chance. The bailout has made things worse, not better.

[WashingtonDCsucks]

11:06 AM on 03/19/2012

Since corporations are people now...... we can start the treason trials.... banks always play both side of every conflict so they are an easy conviction. You think Saddam didn't have a Chase bank account? Aiding a enemy... if he was paid any interest.... opps

I'm sure they will be more reasonable on home loans after a most of the ceo's have been executed as enemies of the state.

[MSROADKILL612]

02:36 PM on 03/19/2012

They are murderers after all - how many suicides have they caused?

[McKeaton]

01:34 PM on 03/19/2012

Blackrock...has 13 trillion assets? they could buy everyhouse on the market!??

[MSROADKILL612]

02:38 PM on 03/19/2012

If so - your point is? given its gotta be profitable.

[tbone99]

10:04 PM on 03/18/2012

Roboing signing bank CEOs need to be doing JAILTIME . With no consequences , there is no end to how deep they will enter into deceit and fraud.

Why couldn't we have elected someone who would stand for justice?

[castlemike]

09:54 PM on 03/18/2012

FAS 157 Mark To Fantasy instead of Market combined leveraged fractional reserve banking.

The TBTF Banks are broke.

[Y3rMawm]

03:57 AM on 03/19/2012

Bingo.

http://www.market-ticker.org/akcs-www?post=203541

[SoClearToMe]

08:20 PM on 03/18/2012

I've said since 2009 that doing business with banks such as Chase, Bank of America, Wells Fargo, etc. is dangerous to one's financial health.

They are not on your side. They prey upon you. Do business with them at your own peril.

[Freemanpdx]

10:31 AM on 03/19/2012

If I could get my mortgage out of Chase, I would. I have a mish-mash of part time jobs now just to keep the underwater behemoth, and no other bank or credit union will touch it, despite the fact that I have nearly perfect credit.

[Julie Baker Morse]

12:56 AM on 03/20/2012

Just for giggles, you may want to go down to your county courthouse to see if your mortgage has a MERS number. It's likely, considering that Chase helped create MERS, and considering that about 60% of all outstanding mortgages are held by a MERS member. If it does, you most likely have a serious title issue; virtually 100% of MERS mortgages have title issues. People with MERS title issues have run into difficulties selling their homes, because the specific owner of the mortgage generally cannot be proven. This may be why no one will take a chance on it. MERS lawsuits are in the works, and may help you; there's also some case law on preventing MERS foreclosures. Read more: http://open.salon.com/blog/sickofstupid/2011/10/20/how_to_make_trillions_commit_fraud_crash_the_economy

[LongBeachHawkeye]

03:00 AM on 03/18/2012

Send the keys back to the bank, folks. Treat an underwater home like a bad investment and walk away. This is how the banks operate. We can operate like that, too. It's the only language the banks understand. And, if you're still banking with Chase, Wells Fargo, or Citibank, shame on you for continuing to feed these vipers!

[Skeetshooter]

12:36 AM on 03/18/2012

P.S. In zombie movies, animated rotting carcasses are obsessed with devouring the living. The same goes for our banking system. Over the years since Glass Steagall was repealed it has become a vast criminal enterprise, obsessed with its own survival. It serves no purpose in a civil society to declare corporations humans when they have no human responsibilities, can't be killed, and are a menace to the living. The GOP argument is that the zombies are like dung beetles, or garbage men, cleaning the carcasses off the streets. Unfortunately, our 'new improved' zombies, with the help of their newfangled 'financial instruments' are not content to wait for their victims to die.