Inflated real estate appraisals under scrutiny
Inflated real estate appraisals could pose a problem locally and nationally, say law enforcement officials from Iowa and Illinois.
Real estate appraisals that come in over the “true” property value threaten home owners and home builders alike.
As the housing market cools — for the first time in years, Quad City sales are down on a year-over-year basis with prices weakening in the upper brackets — folks are confronting a problem that was easily ignored during the real estate boom. The problem is inflated home appraisals.
Critics inside and outside the appraisal business have long warned that many appraisals are too high because generous appraisals help mortgage loan officers and brokers, who often select the property appraiser, complete more deals.
Inflated appraisals were a non-issue when home prices were rising faster, since market values quickly could catch up. If, for example, a Bettendorf home worth $180,000 was appraised at $200,000 in 2003, the price might catch up to the appraisal in a year or two during the real estate boom. Now, some homeowners are finding that the market value is below what past appraisals led them to believe.
Those with flawed credit are particularly vulnerable, says Iowa Assistant Attorney General Patrick Madigan, who coordinates with law enforcement officials from other states on a variety of mortgage-related issues.
Madigan believes that the deliberate overstating of appraisals is “widespread” among loans to subprime borrowers.
Jacquie Doty of Freddie Mac, a big buyer of home mortgages on the national scene, predicts that inflated appraisals will lead to higher default rates in the coming years.
For sure, the inflated appraisal concern in the Quad-Cities likely is lower than in places like Florida or California, where consumers had little choice but to play along with silly appraisals if they hoped to buy a home. In Iowa and Illinois appreciation has been more modest.
Still, T.J. McCarthy, chairman of the Illinois Real Estate Appraisal Licensing Board, says the state’s appraisal regulatory group is “severely under staffed” and that as a result is it nearly impossible to rein in the bad apples in Illinois.
The backlog of unresolved complaints is so lengthy that appraisers acting illegally or unethically can stay in business “for years.”
That’s not good.
Q-C bank chain profits hold up
Two of our local bank chains, First Midwest Bancorp out of suburban Chicago and QCR Holdings Inc. recently reported profits.
Despite the highest cost of funds these companies have faced in years (have you checked CD rates lately?) profits are holding up well.
The keys have been aggressive loan originations and some optimistic assessments — hopefully justified — regarding future loan losses.
For QCR Holdings, which operates Quad-City Bank and other regional banking shops, net interest margin, the difference between what money cost and what the bank could sell it for, slipped from 2.98 percent to 2.90 percent in the latest quarter. Last year at this time the figure was more than 3.3 percent. That hurts. For First Midwest, net interest margin was 3.7 percent, down from 3.76 percent last quarter.
First Midwest took its reserve for loan losses down to 1.24 percent of total loans. QCR Holdings is in the same ballpark, with a reserve for losses at the end of the quarter equal to about 1.12 percent. (The reserve stood at a slightly more conservative 1.3 percent at this time last year.) There is nothing improper about reducing reserves as a percentage of assets. It does help earnings substantially and the practice has been widespread among community and regional banks over the last year or two, as broad sectors of the economy shake off the effects of the shallow but prolonged business slowdown from the early part of this decade.
Overall, earnings at First Midwest were down a penny or two per share from last year, but excluding stock option expenses, which companies are beginning to treat as an expense, earnings were flat. The company forecasts further pressure on earnings as the year progresses. Ditto QCR Holdings, which saw a modest decline in earnings, driven to a degree by spending for the new operation in the Milwaukee area.
QCR Holdings stock continues to be cheap by several measures when its historical and potential growth are dialed in but, as market mavens are wont to point out, a stock can remain cheap, sometimes, longer than an investor can remain solvent.
John Heiderscheit, Bettendorf, a former Wall Street finance lawyer, is president and CEO of Midwest Construction Services, a multi-state business services company. He can be contacted at asl@netexpress.net.