This morning's Rocky featured a big article about a stringent effort by the new chief of the Colorado Division of Real Estate, Erin Toll, to yank the licenses and prosecute, if necessary, of appraisers who phony up the value when submitting the appraisal to lenders.  She says she's currently investigating one where the appraiser "has inflated more than a dozen appraisals."  One case she cites gave a value $100,000 over what it should have been.

And then we ask why Colorado has the highest foreclosure rate in the nation?

There are more causes than the article would suggest, but certainly overinflated appraisals is one.

Earlier this year my dependable Tennessee lender notified me that she had stopped using the appraiser I had suggested she use, and couldn't tell me why.  I have to wonder this morning, did my appraiser inflate the value of one of my client's homes?

The problem is that if other appraisers (and real estate agents) use one of these overinflated homes as a comparable in trying to establish market value, that value will also be inflated, causing buyers to pay a hyperinflated price for the home they're buying..  Then when the house needs to be appraised for refinancing, or value needs to be established when a homeowner needs to sell, the danger is they'll instantly lose whatever equity they thought they had.

Overinflated value caused by greedy appraisers causes a domino effect.  Apparently Ms. Toll thinks that there's more of a problem in Colorado than meets the eye.  Stay tuned for developments on this newly emerging issue.

Today (9/17/2006) the Denver Post, in one of a series of articles on foreclosures, talks about the dangerous nature of 100+ per cent financing, not to all buyers, but to buyers who otherwise wouldn't be able to buy a home and who don't have the reserves to handle the many problems inherent in such loans, or to cover unexpected medical costs, the loss of a job, or another incident that may make mortgage payments impossible.  (Whew, that was a LONG sentence!)

If you're going to use 100% financing, be sure you know what you're doing.  Some real estate agents and some lenders will work overtime to provide marginal buyers with mortgages that will help them buy a house, but have them "upside down" on their mortgage (meaning that your house doesn't have enough value to support what you owe) in a matter of months, either from a general decrease in values, or by having what the Denver Post says lenders call "exotic" mortgages.  The Post says that every single foreclosure in Jefferson, Adams and Arapahoe counties filed in August was an "exotic" loan.

What's really the problem here is that prospective home buyers see that now they can buy with "zero down" when zero down financing should be limited to people who have a strong reserve either in cash or in assets they can quickly convert to cash, and a strong financial position in general.  Then if anything happens they have some money to fall back on during down times.  No solid financial profile here.

Zero-down loans are great for people who have great income but no cash for a down payment, and have a great financial profile.  One of the stories in the Post's story today was a man whose income was from his disability checks plus his new live-in girlfriend's tips as a casino worker.  When they split up he was in trouble. 

103% loans are common, where you can get more than the cost of the home when you buy.  But what happens if you get downsized at work and have a few large unexpected expenses.  A woman I heard about the other day on the radio didn't have insurance because she said "no" to the plan her employer offered, thinking she was too young to get sick (in her early 30s, and thought she could always buy insurance.  That's worth a whole other story, but she said when she finally tried to buy insurance that it was far too expensive, half her take-home pay!).  She was diagnosed with ovarian cancer and couldn't afford to pay the bills that mounted up for treatment -- a hefty $300,000+ dollars.  She didn't say anything about losing a house, but if she'd been in an "exotic" mortgage, there's no doubt what would have happened.  Yes, that's a lot of money.  But you never know when something like that could happen to you.

And that's the point.  Your financial future is always unknowable.  That's why you need a reserve and why you should know what you're doing when you borrow money to buy a house.

Some lenders, by no means all, offer these loans to marginal buyers because "If we don't do it, they will go down the street," as Mike Thomas of Hyperion Capital Group in Aurora said in the Post article.  Unfortunately, they don't have enough business to say "no" to buyers who may "look good" on the surface, but underneath you'll find either a gambler or somebody who's desperate to buy a house and will take these "exotic" loans just to be able to move into a house of their own.

Two reports indicate a sinking market in Weld County with Greeley leading the state in the number of foreclosures in August.  And Colorado is still number 1 with the highest rate of foreclosures among all the states.

I haven't been reporting on the foreclosure rate.  It's a new phenomenon, just starting to make a showing this year.  But since it's an indicator of the economy here in Colorado, and since we just had a report from one of the area's leading economists, Tucker Hart Adams, that Colorado is headed for a recession soon, either in 2007 or 2008 depending on what happens in the national economy, I'd better start paying close attention to the foreclosure rate.

As an Exclusive Buyer's Agent, which means I don't list any homes and all I do is help find homes for buyers, I have seen an enormous jump in the number of foreclosures in the MLS over last year.  I don't specialize in foreclosures, but now I'm beginning to realize that I may begin to have buyers who want to buy foreclosures, though when I've told them about the process they generally change their minds.  Maybe I should begin to specialize in foreclosures, although I can't visualize that.

The Denver real estate market is getting better and better for buyers.  Sellers are reducing the price of their homes by about $10,000 a month, if not more, until they're finally sold.  They're even offering incentives to the Buyer's Agent who brings them a buyer, to say nothing of the incentives for buyers -- down payment assistance, help with closing costs, I even saw a trip to the Carribean the other day.

We've already had our downturn in the market beginning in 2001.  Now, five years later, we're seeing the results of an overheated market prior to 2001.  Foreclosures are at an all time high.

But it's not just foreclosures from then that we're seeing.  It's new foreclosures, people purchasing in January of this year who have been forced into foreclosure.  I'm working with a couple now who are getting ready to make an offer on a pre-foreclosure property (bank owned, not yet foreclosed) where the seller bought the home in January and is now offering it for $8,000 less than she paid for it.  It's an amazing deal for my buyers, but the seller is certainly on the short end of the stick.

So what does all this portend?  If you listen to Tucker Hart Adams it could mean trouble for the Colorado economy, whose forecast for the 2007 Colorado economy is "Unstable Equilibrium," well, at this point it's the same thing I've been saying since 2001.  It's a great buyer's market, and with interest rates not going up by much, it's still a great time to buy.