House Panel to Focus on Real Estate Appraisals; Investigators Identify 322 Thrifts Substantially Damaged by Faulty or Fraudulent Estimates

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WASHINGTON -- At least 322 of the nation's 3,200 thrifts have failed or experienced serious financial problems because of faulty or fraudulent real estate appraisals, according to Federal Home Loan Bank Board data collected by congressional investigators.

Some commercial banks that do real estate lending have been experiencing their own problems with appraisals, according to congressional investigators. Many of the problem loans that the Federal Deposit Insurance Corp. took off the hands of the troubled Continental Illinois National Bank and Trust Co. of Chicago in 1984 were made based on inflated property values, according to agency and congressional sources.

A subcommittee of the House Government Operations Committee has conducted a six-month investigation into appraisal practices, concluding that faulty and fraudulent appraisals have been a major contributor to the troubled real estate loan portfolios of many banks and thrifts. Today, that panel -- the subcommittee on commerce, consumer, and monetary affairs chaired by Rep. Doug Barnard Jr., D-Ga. -- will open a two-day hearing on the subject.

"Our investigation disclosed that where you have a loss, you are very, very likely to have had a bad appraisal," said one congressional investigator. "This ranges from negligence and sloppy work to fraud."

Regulators report that real estate lending based on bad appraisal practices is less widespread in the commercial banking industry than among thrifts. Of the hundreds of criminal referrals the FDIC has made to law enforcement authorities since 1983, only 30 have involved appraisal practices, said Robert F. Miailovich, an associate director for bank supervision at the FDIC.

"We do not see any widespread problem in faulty or fraudulent appraisals," Mr. Miailovich said.

In the thrift industry, which historically has focused its lending in real estate, congressional investigators cite Sunrise Savings & Loan of Boynton Beach, Fla., which was declared insolvent and seized by federal regulators earlier this year, as an example of an institution at which "a string of bad appraisals helped precipitate its demise."

In addition to examining specific cases in the commercial banking and thrift industries, the subcommittee will look at:

* The role of appraisals in federal housing programs. Congressional investigators concluded that faulty mortgage appraisals have contributed to losses in federal home loan programs at the Veterans Administration and the Federal Housing Administration.

* Appraisals in the mortgage-backed securities market. In this area, the subcommittee will focus on Bank of America's decision to take a $95 million loss in the fourth quarter of 1984 in connection with its role as escrow agent for a pool of mortgage-backed securities.

Federal bank and thrift regulators agree that inadequate -- and sometimes fraudulent -- appraisals have led to loan losses. But they contend that these instances are a small part of much larger problem. "It's clearly a problem," said Eric I. Hemel, director of research for the Federal Home Loan Bank Board. "But to what extent it is a symptom [of speculative real estate lending] or the disease, I'm not sure. …