Overvaluing Residential Properties and the Growing Glut of REO

An extensive report -- ``More accurate pricing could lower REO carrying costs in a few ways. As discussed above, lenders could avoid taking on REO altogether by setting their auction reserves lower and allowing others to purchase more properties at auction. Additionally, more accurate prices might help lenders reduce the number of foreclosures they initiate by making more loan modifications look sensible. The more successful loan modifications the lender initiates, the fewer homes thethat will end up in REO, and the lower the lender's carrying costs will be. But if lenders are overestimating the value of weak-market property at foreclosure, then they are likely overestimating the value of the same property when determining whether to offer loan modifications through their net present-value calculations. If the current value of the property is overestimated, it is less likely that a loan modification will be offered, and when one is offered, it will be less generous than if the property's value is not overestimated.''