Oversight of appraisers lacking
CHARLOTTE, N.C. - As soaring home prices set the stage for America's housing meltdown, a critical step in making sure those home sales were a fair deal - the real estate appraisal - was undermined from within.
After the last major banking disaster, Congress set up a system to catch rogue appraisers. Their game: inflating the value of homes at the direction of unscrupulous real estate agents and mortgage brokers, whose commissions are determined by the size of the deals. But a six-month Associated Press investigation found a system crippled by both the bumbling of its policemen and their inability to effectively punish those committing fraud.
And despite ample evidence appraisers are pressured into inflating home values - sometimes to prices in support of loans that are more than buyers can afford - federal regulators have thus far made a conscious choice not to act.
"The system is completely broken," Marc Weinberg, former acting director at the federal agency charged with monitoring the appraisal industry, told the AP before he retired this year. The AP found that:
Since 2005 more than two dozen states and US territories have violated federal rules by failing to investigate and resolve complaints about appraisers within a year. Some complaints sat uninvestigated for as long as four years.
The only tool federal regulators have to force states into compliance is so draconian - it would effectively halt all mortgage lending in a state - it has never been used.
Both state appraisal boards and the federal agency tasked with their oversight are chronically understaffed.
"The appraisal reforms of the late 1980s were good reforms," said Susan Wachter, a real estate professor at the University of Pennsylvania's Wharton School of Business. "But they were not sufficient to prevent what we have seen . . . because regulation without teeth is not regulation."
Experts and industry insiders, including appraisers who feel betrayed by colleagues who don't follow the rules, say the failure to effectively monitor the real estate appraisal industry contributed to housing's collapse.
Appraisers are supposed to come up with a value free of any outside pressure. But more than three dozen appraisers nationwide interviewed by the AP said they often felt pushed by a real estate agent or mortgage broker to fraudulently inflate a property's value. They supplied the AP with documents from lenders asking them to "hit a number." Documents obtained by the AP also show that hundreds of appraisers complained to federal and state agencies about such fraudulent inflation of values.
The federal Appraisal Subcommittee is supposed to help states remove from the system those appraisers who agree to "hit a number." But it has only four employees to conduct field reviews and audits of 50 states and four US territories, and hasn't even had a permanent director since the agency's chief retired at the end of last year.
When the agency does find a state failing to follow the law, the only tool available to force compliance is a death sentence known as "non-recognition" - a penalty that would ban all appraisers in that state from handling deals involving a federal agency.
Getting an honest appraisal
How to ensure you obtain an honest appraisal when buying or selling a home, refinancing a mortgage, or taking out a home equity loan or line of credit:
Q: Who orders an appraisal?
A: Most are ordered by lenders, who use the information to determine the collateral value of a home. But consumers can also order an appraisal, and might choose to do so for a number of reasons. Among the most common is to help them decide on a fair price.
Q: What should I look for when I hire an appraiser?
A: First, look for an appraiser who is licensed and certified by your state. Most states have an appraisal board that should provide an appraiser's qualifications, as will the website of the federal Appraisal Subcommittee: www.asc.gov/.
Q: Will that website tell me what I need to know?
A: Yes and no. The Appraisal Subcommittee's website will feature information about an appraiser's qualifications.
But it will only list disciplinary action that is current. Suspensions and other past disciplinary actions won't be listed.
Q: Can't I get that information from my state's appraisal board?
A: Not really. State boards are generally reluctant to release any information about disciplinary history.
Q: So, how can I make sure I'm getting a fair appraisal?
A: A tough question. Make sure your appraiser is independent - don't allow a lender to pick the appraiser. Also, use a commonsense test.
If the home next door just sold for $150,000 and the appraiser values the home in your deal at $200,000, you have reason to be suspicious. You can also hire another appraiser for a second opinion.
SOURCE: Associated Press 