When Appraisers Cave in, Better Get a Hard Hat
Peterson, James R., ABA Banking Journal
Real estate appraisers nationwide complain that they are under increasingly heavy-handed pressure from brokers and lenders to help get mortgage applications approved. They say they are being forced to inflate property valuations in order to "hit" the values needed to finance the prices on sales contracts. And, should they decline to do so, they claim their invoices go unpaid. And then they are blackballed from further assignments.
This problem goes almost unnoticed when the economy is strong and home values rising. But it can become more obvious when times turn bad, and homeowners who have had their homes improperly appraised find that values of homes are lower than the appraised value.
"No one has measured the extent of the problem," says Peter Barash, of Peter Barash Associates, which represents the American Society of Appraisers in Washington, D.C. "But we think, for good reason, that the problem is serious and ongoing."
The appraisers' problem, here, could be a problem for banks as well, long term. First, the industry doesn't benefit from "appraisal inflation," especially when mortgages are so liable to change hands in the modern mortgage markets. Second, calls for relief from the problem, if not addressed by the industry could take what is now a manageable compliance issue and turn it into a whole new compliance challenge just as the industry is getting used to several new ones--such as new privacy rules.
In the absence of definite action, Congress could step in, causing new headaches, warns John Rasmus, ABA senior federal administrative counsel and staff expert on appraisals.
And bankers needn't wait for Congress. Already, regulators are training examiners to watch for faulty appraisals.
"The test is whether an appraisal contains information that can support its conclusions," says Tom Watson, national bank examiner in the OCC's credit risk division. "A good appraisal will contain clear and well-documented analysis that supports the feasibility of the property. It won't take a leap of faith for us to agree with the information."
Continuing, Watson says that "a bad appraisal is one that relies on some very heavy assumptions--one that borders on fiction."
A blast from the past
Unreliable appraisals were part and parcel of the devastating S&L crisis and could add significantly to bank losses in another poor economy, says Barash. He was a house banking subcommittee staffer years ago when it investigated the reasons for the thrift debacle.
"We held some two dozen hearings across the country and learned that faulty and fraudulent appraisals were a major contributor to the huge percentage of unsound real estate loans," Barash says.
Those hearings led to congressional passage of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which, among its many requirements, called on the states to license appraisers and put some legal weight behind the appraisal profession's Uniform Standards of Professional Appraisal Practice (USPAP). Regulatory scrutiny of the appraisal process was dramatically heightened.
USPAP includes broad ethics requirements that an appraiser can use to support his resistance to pressure tactics. Recently, in response to complaints that appraisers weren't following USPAP, the quasi-public Appraisal Standards Board proposed expanding appraisal standards to provide even more ethical ballast to the professional appraisal practice.
But appraisers say this isn't enough when lenders and brokers can still threaten their livelihoods when they stand firm on ethics.
"USPAP requires appraisers to determine value objectively and independently," says Barash. "But those provisions only bind the appraiser and totally ignore the source of pressure."
New methods change landscape
The problem is exacerbated by key shifts in the mortgage-lending world that took place after FIRREA and its implementing rules went into place. …