Underselling Foreclosures Won’t Recover S&L; Losses

The savings-and-loan crisis is now so big and so widespread that no one knows how many homes, appraised for how much and subject to what mortgage burden, have been taken over by federal authorities. All anybody can know about these foreclosed properties is that by the time they went bad, the S&Ls; holding the mortgages on them also were in trouble, while the government agency insuring their deposits was itself bankrupt.

The properties are in disrepair and have fallen behind on local tax payments. The government agency that owns them has neither money nor plans for fixing them up to attract top dollars in a falling market.

If the government were an investor, it would pull these properties off the market. It would put up the cash to renovate the homes and pay the back taxes in order to rent them out until the market strengthens. But the government needs money and has none to advance to make any.

These properties are also affecting values in their neighborhoods. Even houses in tip-top shape, unencumbered by mortgages, won’t fetch full-market prices if nearby properties are endangered by the threat of a government takeover of a home repossessed by a busted S&L.;

Yet the trouble spreading today is still preliminary. Until recently, responsibility for auditing the damage remained in the hands of the very same local authorities who had winked at the malpractices responsible for the mess. Predictably their damage count was low. No end of rumors clouded the atmosphere before the headlines announced that depositors’ losses had hit the $100-billion mark.

Between the turn of the year and early March, various federal officials, free from any vested interest in understating the damage, worked the new figures in the headlines up to $160 billion. Then, at the end of March, L. William Seidman, chairman of the Federal Deposit Insurance Corp., injected a note of hard realism. Seidman’s count came to $400 billion. Seidman is a hard-nosed professional who knows the territory.

Seidman has since made another statement that makes the connection between the enormous sums of cash his agency has tied up in foreclosed property and its need to get the cash back from sales as fast as it can. “Everything we have is for sale.” Seidman said. “If we can get appraised value, we’ll sell it.”

Close scrutiny shows, however, that the condition Seidman laid down is neither the safeguard for property values that homeowners and their mortgage bankers want nor what it may sound like. The key to an easy government resale operation turns on “appraised values.” A Dallas banker offered the Wall Street Journal a succinct view of the high risk to homeowners’ values that ride on appraisers’ responses to market conditions. “The appraisers killed us on the way up,” he moaned, “and they’re killing us on the way down.”

Real-estate appraisers can outdo even stock market traders in exaggerating both good and bad news. They encouraged home buyers to overpay and lenders to overlend when real-estate values seemed limitless. Now they are pulling the plug on the real-estate market even faster than distress selling is hurting it.

Appraisers who were over-liberal in supporting loan applications during the no-problem years are making amends for their laxity by deflating current valuations faster than the market is deflating sales prices. So the appraised value signal is inviting government sellers to dump foreclosed properties for any price they can get, while trumpeting warnings to everyone with a stake in property values.

Most of the net worth of the country’s families is based on the equities in their homes. Two-thirds of the government’s tax revenues come from individuals, most of them from home-owning families. If there was ever a case of the direct cash interest of the government being at cross-purposes with the country’s home-owning families, the S&L; crisis is providing it. And every new dollar the government shells out to make S&L; depositors whole, as it has vowed to do when it takes over underwater S&Ls;, sharpens the conflict.