San Diego Housing Bubble News and Analysis

Most land loans are written at or below 50% of the value of the property, just to avoid undue exposure from market corrections like this. It can be bad, but unless they were stupid about their underwriting it's not as bad as it might otherwise appear.

bugs:

what do you think of the probability that land appraisals during the past run up were taken at face value simply due to the "sure thing" that real estate was? ie., everyone was stupid about their underwriting for the past few?

There is no need to reprice bank loans that are sitting on the balance sheet, if they are current. That is, even if the land is falling in price, as long as the borrower is making payments, there is no need to mark them down. We generally don't live in a world where assets (loans, at least) are marked to market.

However, if the borrower defaults, and the bank has to sell the land, it will certainly show a loss if it sells the land for less than the loan.

Bugs is correct - land loans are *typically* very, very conservative. If lenders have been too aggressive on this front, they are going to get seriously slammed.

Unlike most house appraisals, land appraisals are performed by much more experienced appraisers and all of those appraisal reports are read for content, even when times are good. The assignments generally originate at the lending institution whose money is going out the door and they usually aren't sold off to investors and they wouldn't be bundled into securities instruments and sold off in tranches.

Since 2001, the number of fully licensed/certified residential appraisers has increased by 60%. Meanwhile, the number of commercial appraisers has actually declined slightly. That means that in the last few years the chances of a house appraisal being completed by someone with less than 5 years in the business was extremely high, whereas the chances of a commercial appraisal being completed by someone with less than 10 years of experience was extremely low. The qualifications criteria for commercial appraisers is much higher, and on average so is the educational level. Commercial appraisers have a much broader scope of practice, meaning they have to be conversant on far more property types than just the one; and they have to have strong analytical and writing skills.

That all speaks to technical competency. Our business also has ethical requirements that are separate from the skills set. Unfortunately there are plenty of appraisers on both sides of the business who are weak in this area. However, since those loans are almost all help in the originating lender's portfolio there's a lot more accountability on that end of the business.

The buyers and sellers in the land market are usually not laypersons, either. They usually have a better understanding of what their property is and isn't. There was still a LOT of agressiveness in those markets, but the risks to a lender are tempered when a buyer is putting down 50% or more of the purchase price in cash.

This long-winded diatribe is my way of saying that the declines in the land market will be much more attributable to market conditions than to overencumbrance on the lending side. It'll still be bad, though, because developers won't buy unless/until it's time to develop. Everyone else is a discretionary buyer and can afford to wait the market out.

Graham

Nice post.

Pity the securitization was not all made up of this stuff.