Why do appraisers not have to consider as value when banks foreclose and are paid the Private Mortgage Insurance.?

Asked by Tanner, Fresno, CA Sun Aug 21, 2011

Banks seem to foreclose more on homes paying PMI than Conventional loans where they pay 20% down & doing so is devastating the medium & lower income communities. If a bank forecloses on say $250,000. property, the PMI insurance agrees to pay them 200,000 and then the bank puts it on the market for $50,000, who is loosing here? (The traditional seller). The bank does a short sale. Say property is $150,000. They agree to short sale it for $80,000 and take a write off of $70,000. (not to mention the kick backs they get from the government, Our tax dollars) who is loosing? (The traditional seller). My property has gone down $215,000, I cannot write if off or HUD/FHA insurance make it up. I was told that Appraisers were not supposed to use foreclosures or short sales in their comps but they do. That being the case they should have to consider the FULL amount or a % of monies the banks are getting & add that to the lenders sale price. The values would be fairer, or sue all the SOB's

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Joe Cusumano’s answer
Joe Cusumano, Agent, Riverside, CA
Sun Aug 21, 2011
The short answer is that it is impossible to know what their logic is. It really depends on the investor who holds the loan. If they have pmi they are more opt. To foreclose if they need the cas asap. It depends on what they are trying to do. I tried making sence of it all so I would not go crazy. Our logic and their logic is not the same.
0 votes
The Medford…, Agent, Fremont, CA
Mon Aug 22, 2011

The irony here is that the real estate market is driven by consumers, not the banks. It’s basic supply and demand economics. When REOs first started coming on the market in floods, they were at the current market pricing or a tiny bit below.

Problem #1. No one was buying them. In fact, no one was buying much of anything. So banks lowered the prices until they started to sell.

Problem #2: There was far more inventory than available buyers, so the prices continued to fall. Not because the banks wanted to lower prices or because they were trying to dump properties at substantially discounted rates or because of the amount they were able to get reimbursed by various government agencies … but because that’s the price consumers were willing to pay.

Problem #3: As pointed out by Ron, many of these properties were significantly damaged and had to be discounted. I’ve seen some pretty nasty places over the past few years.

This is important: When a property is appraised for ANY reason, the financial factors behind the scenes are not a party to the appraised price or appraisal process. The condition of the subject house in relationship to other local comparative sales is what actually determines the price.

As an example, a person who has managed to pay off their house and owes nothing will get an appraisal at market value. Let’s say that right next door is an identical short sale that is upside down by $250,000. The appraiser will appraise it for the same price as the home that is paid off. As a final argument, let’s assume that a nasty REO came on the market right across the street – the exact same model as the other two homes, yet trashed inside. The appraiser will use the values of the first two houses and then subtract for the condition of the REO. It will be therefore be priced LESS … not because of its status as an REO but because of its condition.

Let’s say the base market price for all three homes is $300,000. The irony of the above situation is this:

• Because the first house is owned by a normal seller who has an inflated idea of their homes’ worth, it will go on the market at $330,000. And sit there until the price drops to reality.
• Because the short sale listing agent needs to get an offer in a hurry, the short sale house will go on the market for $270,000. It will get multiple offers within a week – most likely at over the asking price, and then sit there for 6 months, have its price adjusted up by the bank and finally sell for $292,000.
• Because the REO is trashed, it will go on the market for $285,000. It will languish a month or so until the bank lowers the price, at which point someone will come along and lowball the price. Because it will have been on the market over 60 days AND it is in poor condition, the bank will be motivated to get it out the door and will accept $260,000. At the end of the day, it will actually sell for a price that is commensurate to its condition because it will take at least $40,000 to get it back into good condition.
• In the meantime, the normal seller is griping and complaining about the effect of REOs on his price, not realizing that if he had set his price correctly at $295,000 out the gate, he’d have sold a long time ago – might have actually received multiple offers driving his price over the $300,000 benchmark. He would have sold BEFORE the short sale or the REO – and his sold price would have set the benchmark for the other two – NOT, as usually happens, the other way around.

In reality, none of them were priced right at the beginning, and it has NOTHING to do with the conditions you’ve stated in your question.

In reality, this is very typical, and, when the day is done, it’s not the banks ruining the market. Their properties are being trashed by owners angry with their situation who are deliberately either destroying equity or blatantly stealing (frequently entire kitchens) – and not getting prosecuted for their theft.

So who IS ruining the market? How about normal sellers with artificially high expectations or short sales where the investors behind the loan are actually taking it in the shorts? Short sales hang out on the market for VERY long periods of time with pending prices that are, in many cases, absurdly low. In most cases, the short sale prices get adjusted upwards closer to reality once a bank does a BPO. But buyers, seeing the ridiculous list prices out there for so long, assume that’s the price at which it will sell and make their offers for other properties in line with the artificially low “fake” short sale list prices.

So who is REALLY driving the market down?
0 votes
Brad Maaske, Agent, Fresno, CA
Sun Aug 21, 2011
Hi Tanner,

First to answer a couple of misconceptions. The bank is usually just servicing the loan for a note holder. In both foreclosure and short sale the bank attempts to get as high of a price as possible. It does not matter if there is mortgage insurance. I have never seen a home with a real value of $250,000 sell for $50,000 because of mortgage insurance. The bank can't even make a claim for mortgage insurance until the property is sold. If it is sold for less than current market value, the insurer will deny the claim. The insurance is usually only for the first 20% of the loan at the most.

Many homes with mortgage insurance end up as foreclosures not short sales because the mortgage insurer tries to get the seller to pay money to close escrow. If the seller had money they would be keeping their home.

Finally to answer your question about why appraisers can use foreclosures is that in the Fresno market foreclosures and short sales still represent about 70% of what is closing. Adjustments are made for condition of property when comparing each property. There is no public record or anyway that an appraiser can find out what a bank was paid by an insurance company. So the appraiser just has to look at several sales to find the real value, all things considered.

The market can't begin to recover until we stabilize the short sales and foreclosures in our communities.
0 votes
Ron Thomas, Agent, Fresno, CA
Sun Aug 21, 2011
First of all; who told you that Appraisers are not supposed to consider SS and REO's as Comp's?
Three years ago, that was feasible; today, it is impossible.

But it really doesn't matter, the way that Appraiser do the math, they allow for Special Circumstances and Condition.
Since 70-80% of the market is SS & REO's, it cannot be ignored.

As far as the ways in which Banks make their money; that really doesn't enter into our balliwick:
When we are trying to pick-up a SS or an REO, knowing how much or little the Bank is making on the deal, does not help us in the slightest; we cannot leverage that information or use it against them.
Envy or Anger by the homeowners has led them to destroy houses when they are being displaced, and it serves no purpose other than to hurt the new owners: One questioner told me she poured milk between the studs!
The Banks are in business to make money, same as Hardware stores and Car Dealers.
They just advantages that other businesses do not.
0 votes
Bill Pfeif, Agent, Fresno, CA
Sun Aug 21, 2011
Just FYI there are lots of people like me who have lost real money as my Real Estate is paid for. You lost something you never paid for and have the option of walking away! What about me?
0 votes
Bill Pfeif, Agent, Fresno, CA
Sun Aug 21, 2011
Appraisers are responsible for current value based on all pertinent factors affecting the current market. Foreclosure is a factor that heavily impacts value. Mortgage insurance does not!
0 votes
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