There is increasing evidence that the unregulated real estate appraisal industry is a major contributor to bank failures and a growing threat to the U.S. financial system.

Before a person can become a barber, a plumber or an electrician, most states require some test of competency. It goes without saying that other professionals such as doctors and engineers must be licensed.

Yet in most states, an appraiser can hang out a shingle with no questions asked.

Billions of dollars in real estate loans and investments are made every year, and the appraisal plays a key role. From the $100 million commercial real estate deal to the $100,000 home mortage to the sale of millions of dollars of mortgage-backed securities, at some point a real estate appraiser decides how much each deal is worth. The appraisal determines the value of the property that will be collateral for the loan.

Lenders and investors expect the appraiser to give them the right value. If the borrower defaults on the loan, the lender expects that the property will be worth enough to cover the outstanding debt.

Through stupidity or deliberate fraud, an appraiser can overvalue a piece of real estate. For example, a person taking out a second mortgage on a home qualifies for a much bigger loan if the appraiser inflates the home's value. The stakes are bigger in multimillion-dollar real estate deals. In both cases, the lender is left holding three pounds of flour in a five-pound sack.

As vital as appraisals are -- most lenders will not lend without one -- anyone can perform them in more than 40 states without having to show any competency or obtain any certification.

The performance of the appraisal industry has come under intense scrutiny by the House Government Operations subcommittee on commerce, consumer and monetary affairs. The first skeletons were discovered in the appraisers' closets during an investigation into bank and savings and loan failures and the role of insider misconduct in those collapses.

A dramatic number of faulty and fraudulent appraisals were found in the real estate loan portfolios of nearly every failed and failing institution.

The faulty appraisals "were used to fool bank examiners," according to Doug Barnard Jr. (D-Ga.), chairman of the subcommittee. "They were used to make a dangerous or even fraudulent real estate loan appear secure by having in the loan file an appraisal which assigns an unrealistically high market value to the property collateralizing the loan," he said.

Late last year, the subcommittee prepared a major report. That report, reviewed by our associate Michael Binstein, concluded that "faulty and fraudulent real estate appraisals have become an increasingly serious national problem whose effects are widespread, pervasive and costly . . . . "

Barnard has introduced legislation that would create a new Federal Interagency Appraisal Council to write uniform appraisal standards and appraiser certification requirements.