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Appraisal Problems Worsened Meltdown
Bob Ipock, a North Carolina appraiser, said the federal oversight system for appraisers is broken. Critics say that contributed to the housing collapse.
(By Chuck Burton -- Associated Press)
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This is how the system is supposed to work: Typically, appraisers receive orders from real estate agents, lenders or mortgage brokers. Based on a physical inspection of the home and comparable sales in the area, they develop an estimated value. That figure is used by banks to set a home's value as collateral for the mortgage loan.
Appraisers should be free from outside pressure when they come up with a value. But more than three dozen appraisers nationwide said they often felt pushed by a real estate agent or mortgage broker to inflate a property's value, which constitutes fraud. They supplied documents from lenders asking them to "hit a number."
Other documents obtained by the AP show that hundreds of appraisers complained to federal and state agencies about such allegedly fraudulent practices.
The appraisal system has broken down before. In 1989, Congress concluded that "faulty and fraudulent appraisals were an important contributor to the losses that the federal government suffered during the saving and loan crisis." And it passed the Financial Institutions Reform, Recovery and Enforcement Act.
Under the law's reforms, a private group known as the Appraisal Foundation wrote the new rules. The law also recommended that states begin licensing appraisers and disciplining rule-breakers.
The Appraisal Subcommittee, an independent federal agency that answers to Congress, would conduct field reviews and audits, and maintain a national registry of appraisers -- including dossiers on those who break the rules.
But problems plagued the system from the start. It took years for some states to set up the independent review boards to supervise appraisers or to hire personnel to investigate complaints. Even now, eight states do not require appraisers to obtain certification.
"We got to this point by a lack of enforcement," said Bob Ipock, an appraiser from Gastonia, N.C., who is a critic of the current system. "The public has the right to expect the appraisal boards are taking care of that problem. And they are not. They're looking the other way."
The Appraisal Subcommittee is supposed to help states remove appraisers who agree to "hit a number." But it has only four employees to conduct field reviews and audits through the whole country, and it hasn't had a permanent director since the agency's former chief retired at the end of last year.
Following Weinberg's subsequent departure in February, none of the agency's current employees -- including interim director Vicki Ledbetter -- returned messages left by the AP over a period of several months.
When the agency does find a state violating 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.
"Do you know what that would have meant? The net effect is it would have effectively shut down mortgage lending in that state," said former subcommittee director Ben Henson, who retired in December. "To take that action would have been an unbelievable disruption to the economy. I wasn't going to do that."
