“A lender has every right to refuse to lend $400,000 on a $500,000 property because they feel the underlying value is really $350,000. They don’t have to follow the ‘crowd’.”

You didn’t understand that example at all. Let’s say it is early 2004. A builder offers 12 homes for sale in Phase 5 of a 7 Phase tract. All of the homes in this phase sell for $495,000- $505,000. The GOOD CREDIT ONLY BANK makes a loan to a Borrower with an 800 credit score and a $100,000 down payment. Any appraiser would have no issue saying that these homes are worth $495,000 to $505,000 because they have 11 comparible sales on the same street.

In late 2005 Countrywide starts sending out their mailers stating that it is a great time to refinance at a lower rate and take out some some equity. 5 of the homeowners on the street take advantage of the offer. The appraisers are convinced to value these homes at a 15% increased value ($75,000).

Mid 2006, some NOD’s start appearing and by early 2007, there are 4 foreclosures. Countrywide (and other banks in the tract) now “battle” for any remaining buyers and dump prices.

Early 2008, some deals start happening in the high $300’s.

What is your $500,000 home (with your 800 credit score and 20% down payment) worth now? What is the value of the collateral for GOOD CREDIT ONLY BANK?