Appraisal Problems Worsened Meltdown

Illegal Practices and Poor Oversight Factored Into Real Estate Bust, Critics Say

CHARLOTTE, N.C. -- As soaring home prices set the stage for America's great 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 nation's last major banking disaster, Congress set up a system to catch rogue appraisers. Their game: inflating home values under directions from equally 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 that Congress's system is crippled by both the bumbling of its enforcers and their inability to effectively punish those caught breaking the rules.

And despite ample evidence that appraisers are pressured into inflating home values -- sometimes to prices that make loans unaffordable -- the federal regulators charged with protecting consumers have thus far not acted.

"The system is completely broken," said Marc Weinberg, the former acting director at the federal agency charged with monitoring the appraisal industry, before he retired earlier this year. "It's amazing that the system ever worked at all."

The AP conducted dozens of interviews and reviewed thousands of state and federal documents, and found:

· Since 2005, at the height of the housing boom, more than two dozen states and U.S. 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. As a result, hundreds of appraisers accused of wrongdoing remained in business.

· The only tool federal regulators have to force states into compliance is so draconian -- it would effectively halt all mortgage lending in a state -- that it has never been used.

· State appraisal boards and the federal agency tasked with their oversight are understaffed; many have only one full-time investigator to handle the hundreds of yearly complaints. Some don't even have an investigator.

"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."

To be sure, there are many causes for the housing crisis -- lenders who allowed people with spotty credit to buy homes with little or no money down, mortgage brokers who focused on selling loans without regard to borrowers' ability to repay, and investment bankers who traded risky mortgage-backed securities. A few of the worst offenders -- appraisers included -- have been put behind bars.

But experts and industry insiders, including appraisers who feel betrayed by colleagues who don't follow the rules, said the failure to effectively monitor the real estate appraisal industry contributed to the housing collapse.