The Federal Reserve Board, strongly criticized for loosening real estate appraisal standards instead of tightening them in the face of mounting real estate-related loan losses at the nation's savings institutions, is reconsidering its controversial stance.
"We're just looking into the possibility" of adopting a new position on the issue, said John P. LaWare, a member of the Fed's board of governors. He declined to set a date for when it might issue a new decision.
As part of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), the Federal Reserve Board and other regulatory agencies were instructed by Congress to establish meaningful appraisal standards that would help protect taxpayers from funding future bailouts of financial institutions.
A strong appraisal process is considered key to ensuring that the underlying real estate on which loans are made is worth the amount lent on the properties.
Failures in the appraisal process, which is widely unregulated and lacks any standardized system, are widely believed to have contributed to the collapse of hundreds of savings and loan institutions. Cleaning up the mess is expected to cost American taxpayers between $150 billion and $500 billion, making it by far the most expensive financial debacle in the nation's history.
The FIRREA legislation passed last year, and this summer the regulatory agencies took up the job of establishing specific regulations on appraisals. The Fed's guidelines were viewed as particularly significant because the agency, which oversees the nation's banks, was expected to set the standard for appraisal regulation for the other government agencies.
The agency's original proposed guidelines, issued early this year, were enthusiastically received by many independent real estate industry observers and the appraisal industry. But several months later, when the final regulations were released, some surprising adjustments had been made.
Under the Fed's new rules, properties under $100,000 in value -- which encompasses much of the U.S. residential real estate market -- would not require an appraisal at all. In contrast, the proposed guidelines had set the mark at $15,000.
The Fed also ruled that all transactions of less than $1 million will be presumed "non-complex," and thus require evaluation only by a licensed appraiser, a category that requires only minimal experience and training.
The trade organizations that represent lenders, home builders and real estate agents were pleased with the looser rules, which they said would help keep appraisal costs down and prevent delays in real estate transactions.
But many others were stunned and disappointed by the Fed's position. Two industry groups, the private mortgage insurance and the appraisal industries, as well as the House subcommittee that originated the appraisal provisions of the FIRREA legislation, have joined forces in asking the the Fed to reconsider its final ruling, which was published in July.
"In effect, it nullified the program and gutted the intent of FIRREA," said Suzanne C. Hutchinson, executive vice president of the Mortgage Insurance Companies of America, who said the Fed's decision effectively removed about half of the nation's mortgage loans from a standardized appraisal process.
Hutchinson said that of 57,000 claims paid by the mortgage insurance industry in 1989, totaling about $873 million, the majority of the losses occurred on properties valued at less than $100,000. She said that a significant amount of those losses could have been avoided if the nation's appraisers followed standardized procedures and were adequately trained.
The House subcommittee on commerce, consumer and monetary affairs has also voiced its disapproval of the Fed's final ruling. In a four-page letter to Fed Chairman Alan Greenspan, the subcommittee wrote that the final regulations issued by the Fed "will undermine the essential purposes" of the appraisal provisions of FIRREA.
The appraisal industry organizations also expressed dismay at the Fed's position, particularly in light of the flack the industry has received in the last few years for its perceived contribution to the S&L crisis.
"Unfortunately the Fed didn't understand -- or didn't see -- the pieces of the puzzle," said Donald Kelly, a spokesman for the Society of Real Estate Appraisers. "It is understandable; it's complicated."
Kelly and others in the appraisal industry said they believed that the board of the Fed had been influenced in their decision by real estate and banking trade lobbies that had long opposed meaningful appraisals standards because they feared they might hamper real estate transactions.
Those groups, for their part, have charged that the appraisers are primarily interested in establishing their own monopoly and ensuring that their members get the lion's share of work under the new guidelines.