Sean,

Terrific post up until the sales comparison comment. I know exactly what you're saying though, but what lenders need to do is revamp the whole way they think about appraisal. Instead of being a single point in time incident, it should be a continuous and on-going valuation dialogue. Think of it this way, if they "mark to market" securities, they should treat the assets collateralizing pools similarly versus relying on automation or other 3rd party analysis that was not a party to the origination of the debt. Appraisals, industry wide, tied to securities, should have a present and “future value” component to be recertified a period later, say 1 year. In doing so, they can appropriate provisions adequately against losses necessary to adjust rates or upfront premiums with the market, not in perpetuity of the market.

As to relying on a cap rates in a residential assignment, it would be done in addendum to the sale comparison method anyway. But what is more important, in my judgment, is median income analysis. A bank simply can not lend 80/20 finance on $850,000 in a $60,000 a year median area. Lenders were not absent the resource to be prudent, hence Paul Volkers' recent comment that the system failed the test of the market. Securitization is great as long as incentives to originate/distribute quality, not quantity, are aligned throughout the money chain.

Michael