Big investors are valuing homes with a method outlawed for everyone else after the housing crash --  and the SEC is asking questions

  • Large investors are increasingly using so-called broker price opinions to value and purchase thousands of homes on the brink of foreclosure.
  • This method is used in place of traditional appraisals, which are done by licensed professionals and usually cost more.
  • The Securities and Exchange Commission is investigating whether companies are using BPOs to wrongly inflate property values.

A method of valuing homes that was outlawed for most people after the financial crisis is still popular among large Wall Street investors.

According to The Wall Street Journal, investors including Blackstone Group are increasingly turning to so-called broker price opinions, or BPOs, to value tens of billions of dollars’ worth of homes.

Sometimes, the report says, the price evaluations are done remotely: outsourced to India and conducted by real-estate agents using online listings and Google Earth searches. That’s different from traditional appraisals, which involve visiting homes and estimating their value while noting details like moldy walls that may affect that value.

After the housing bubble popped a decade ago, Congress outlawed BPOs as the primary way to value a home for the purpose of getting a loan. But large Wall Street firms that want to buy up several thousands of houses that are typically in foreclosure are still allowed to use this cheaper method.

“There’s a reason why they are $US50,” Jonathan Miller, the CEO of the real-estate appraiser Miller Samuel, told Business Insider. “It’s just a way to put papers in a file to comply with regulations.”

The Journal noted that for large investors, having an appraiser visit every home that needs to be valued is not always the most efficient route. Still, Miller contends that the extra cost of using a traditional appraiser is a rounding error in valuing the homes in question.

“There are nuances between properties that you don’t get from a BPO or outsourcing to India,” Miller said.

The Securities and Exchange Commission is also scrutinizing whether companies are wrongly inflating BPOs. Besides determining the value of a home, BPOs are used to value securities that are then sold to investors.

In May, the mortgage insurer Radian Group said in a regulatory filing that one of its units was among those that the SEC asked about its practices.

Head over to The Wall Street Journal for the full story »

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