Capitol Hill took its first peek at a far-reaching new proposal this week -- a bill that could affect the appraised market value of your house, condominium, second home or other real estate.
It's called the Real Estate Appraisal Reform Act of 1987, sponsored by an influential House subcommittee chairman, Rep. Doug Barnard Jr. (D-Ga.). The product of more than a year of congressional investigation and hearings, Barnard's bill would turn the American system of real estate appraisal on its ear. In the process, it would seek to save taxpayers and federally insured lenders billions of dollars.
If you're like most homeowners or buyers, you have probably only had contact with appraisers when you go to sell, refinance or purchase a piece of property. Somebody comes to the property, walks around jotting notes, takes a few photos and disappears. At settlement, a charge for $100 to $250 shows up on the settlement sheet, paid for by either the buyer or the seller.
You have probably assumed -- if you've given it any thought at all -- that appraisers are like other real estate professionals, that they're regulated in some way by the government and they have training requirements to fulfill before hanging out their shingle.
Not so. Barnard's subcommittee's investigation found that in 48 of 50 states, anyone can hang out a sign and do business as an appraiser, almost overnight. There is no state, local or federal regulation of the field, with limited exceptions.
As Barnard put it last week: "I find it more than strange that if an individual wants to be a barber or a beautician -- let alone a doctor, lawyer, architect, engineer or accountant -- in any of our 50 states, he or she must meet certain qualification requirements, demonstrate competency by passing an exam, and be licensed and supervised by a state authority. And yet real estate appraisers, whose market-value estimates are crucial to lending and investment decisions in projects often worth hundreds of millions of dollars, are untested and essentially unregulated."
The financial significance of appraisers' roles was brought home dramatically by the Barnard subcommittee's yearlong investigation of the nation's ailing savings and loans and banks. The probe found dishonest appraisals and outright fraud rampant. It documented $3 billion worth of inflated property appraisals in a sample of distressed S&Ls insured by the Federal Savings and Loan Insurance Corporation (FSLIC). FSLIC has run deeply into the red because of heavy payouts to depositors in bankrupt thrifts.
The probe also spotlighted what it called the core problem of the American real estate appraisal system. Since appraisers need not fear state or federal review of their work, their principal concern too often has been to please clients by turning in valuations at the price they suspect the clients want. Rather than displeasing a loan officer who's already decided to make a loan -- and doesn't want to hear that the property really isn't worth the inflated price -- many appraisers simply "go with the flow," and hope the property never ends up in foreclosure.
Appraisers who have refused to tailor reports to their clients' desires, investigators found, have been blacklisted by certain real estate firms. They have been cut out of the business, in effect, because they insisted on doing their jobs ethically.
Barnard's conclusion is that the core problem has to be removed. His bill would force appraisers for the first time to look to a nationally uniform set of appraisal standards, established by a new federal council and enforced by state licensing boards.
The bottom line of the legislation, in Barnard's view, would be to provide a sort of double-edged protection for the American real estate appraisal industry. First, the consumers of appraisal services -- the public as a whole plus lenders, realty brokers and developers -- could again trust the validity of appraisals. Second, the appraisers would gain by improving their image.