Nearly one out of every four properties purchased by investors at auction over the past four years has cost them money, not because they didn’t know what they were dong but because lenders overvalued them when setting minimum bid and reserve amounts. Especially in markets with weaker demand and an older housing stock. As a result, investors in one market alone, Cleveland, have lost over $56 million since 2006.
A new study by two economists at the Federal Reserve Bank of Cleveland, Thomas J. Fitzpatrick IV and Stephan Whitaker, found the systematic overestimation of property values in weak housing markets by appraisers, investors, and lenders is causing lenders to foreclosure rather than modify loans, increasing already swelling foreclosure inventories, and creating huge losses for themselves as well as investors and federal agencies who end up with overpriced properties in declining markets.
How Lenders Overvalue
Rather than basing their valuation on what properties are actually worth at the time they are sold at auction, lenders are using a uniform process that works well in higher value areas but not so well marginal markets full of aging housing where prices are declining quickly—which also happens to be the scenarios many investors consider to be happy hunting grounds. A dri
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