Editor’s note: Bending the numbers on home valuations is often referred to as appraisal inflation, and appraisers say it’s common for colleagues to do this in order to satisfy clients and stay in business. Appraisers nationwide say commission greed among their clients is feeding the corruption. In this three-part series, we examined the problem and what the industry is doing to try to stop it. (See Part 1: ‘Appraisal inflation’ a major real estate problem and Part 3: Two sides to appraisal technology debate.)
Fraudulent real estate appraisals contributed to the savings and loan crisis of the 1980s, and legislators passed the Financial Institutions Reform, Recovery and Enforcement Act and adopted Uniform Standards of Professional Appraisal Practice to address these problems. Also, states now are more actively involved in regulating appraisers.
Still, appraisers say, their industry is plagued with abuses and enforcement of rules is lacking.
Some appraisers willingly bend numbers on home valuations to satisfy their clients and get more work, a practice known as “appraisal inflation.” In its most destructive form, appraisal inflation can assist predatory lending practices and can play a role in flipping schemes, in which properties are fraudulently assessed to win a high loan amount and then resold for even higher prices. Exaggerated appraisals can lead to inflated home prices, increasing the risk of loan default and foreclosure and placing homes out of reach for some prospective buyers.
Appraisers say those who perpetuate the problem can be rewarded with more work. The result is a fragmented industry in which some appraisers are ostracized because they do not break the law.
Do you think appraisal inflation is a growing problem?
Nationwide, there are roughly 100,000 licensed appraisers, and their professional responsibilities and required qualifications are clearly outlined in national standards and federal law.
The U.S. General Accounting Office in 2003 released a report on the oversight of the appraisal industry, finding that some state regulatory agencies “may be unable to adequately enforce appraiser compliance with the minimum (federal) standards.” Several state regulators cited “lack of funding and resources,” according to the report.
In response to this report, the American Society of Appraisers, American Society of Farm Managers and Rural Appraisers, Appraisal Institute and National Association of Realtors submitted a letter to Congress urging a full investigation of the appraiser regulatory structure.
The Appraisal Foundation, a non-profit education organization, is authorized by Congress as the source of appraisal standards and appraisal qualifications. It serves as the parent organization to two boards that establish education, experience and examination requirements for appraisers, and develop and amend national standards of practice.
The foundation also created an Industry Advisory Council that is composed of lenders, accounting firms, appraisal companies, insurers, real estate brokerage firms, pension funds, investment bankers, and others with an interest in the valuation process.
A number of appraisal organizations provide financial support for the foundation, as do the American Bankers Association, Farm Credit Council, Mortgage Insurance Cos. of America, and the National Association of Realtors.
There is also an Association of Appraiser Regulatory Officials, which has a mission to “improve the administration and enforcement of real estate appraisal laws” across the country.
The Appraisal Institute, with more than 18,000 members and 99 chapters in the United States, Canada and abroad, has a mission to uphold professional credentials, standards of professional practice and ethics for the public good. The institute has an active lobbying arm that communicates regularly with elected officials and regulators in Washington, D.C.
Other professional organizations represent appraisers, including the American Society of Appraisers, American Society of Farm Managers & Rural Appraisers, International Association of Assessing Officers, National Association of Independent Fee Appraisers and National Association of Master Appraisers.
The Appraisal Institute cites client pressure as a continuing problem for the profession — “parties with an interest in the transaction, such as lenders, brokers or realty agents, apply pressure on the appraiser to meet predetermined value to help justify a mortgage transaction or exchange of real estate.”
This pressure typically occurs when appraisers fail to meet a predetermined value, and appraisers who do not meet this value can find that they are locked out of future work as a result, according to a description at the institute’s Web site.
In 2001, the Appraisal Institute requested that Congress investigate this pressure on appraisers “because of evidence that it can contribute to mortgage fraud. The Appraisal Institute has reached out to mortgage banking, mortgage broker and other real estate associations to plan a coordinated response to this challenge.”
In October 2003 the nation’s major financial institutions, including the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corp., among others, released a statement about the required independence of a real estate appraisal and evaluation program from a real estate transaction.
Gregory Accetta, who serves as vice chairman of the Appraisal Standards Board, which develops and amends national standards of practice for appraisers, said one of the challenges for the board is to establish policy that is readily enforceable. “It’s not always ‘do people know the difference between right and wrong,’ “he said. “It’s ‘are they willing to enforce it?'”
He added, “The challenge for us is to write regulations which are clear enough and precise enough to allow enforcement. We need to make the requirements straight forward and use appropriate and precise language.” Accetta said that the appraisal profession has historically had “very low barriers to entry,” and there are now more qualifications to enter the business. While the board can set standards for appraisers, Accetta said the board does not recommend legislation.
He added that there has been a longstanding requirement that appraisers not accept any assignment in which clients ask them to meet a specific home value. Accetta said that some issues consistently come up at public meetings of the board, among them: appraisal inflation, pressure on appraisers, and appraisers’ role in mortgage fraud and property flipping.
“Those are problems of the industry, (they are) part of the real estate industry in general,” he said. “Our standards apply to individuals and professionals themselves. They have to make sure they’re not compromising their ethical responsibilities. If they feel they’re in an inappropriate situation then they can change it or leave.”
Francois (Frank) Gregoire, a Realtor and appraiser who is chairman of the Florida Real Estate Appraisal Board, said that while many organizations have worked to address the issue of appraisal pressure, there is little to show for the efforts.
“The National Association of Realtors Appraisal Committee has over the past four years participated with other professional associations, including the Appraisal Institute, American Society of Appraisers and the National Association of Independent Fee Appraisers in efforts to deal with pressure. All the above organizations have attempted to work with the Appraisal Subcommittee, HUD, Fannie Mae and Freddie Mac, but little has been accomplished,” Gregoire said.
The Association of Appraiser Regulatory Officials often brings up the problem of appraisal pressure in meetings with regulatory agencies, too, he added.
Fraud will persist whether or not there are laws to stop it, said Robert G. Johnson, executive director of the National Association of Real Estate Appraisers. While Johnson said he doesn’t think there is a problem with appraisal fraud these days, “You can’t legislate fraud. If that fraud happens, it happens.”
Johnson said he does see a problem with ever-increasing educational mandates for appraisers, saying they are too restrictive.
The Appraisal Qualifications Board, affiliated with the Appraisal Foundation, last year approved new training qualifications for appraiser licensure, upping the residential certification requirement from 120 hours to 200 hours, effective Jan. 1, 2008.
David S. Bunton, Appraisal Foundation executive, said in a statement that “the qualifications for licensure and certification by the states are too low,” and the new requirements will help to bring qualifications up to “a meaningful level.”
Tawfik Ahdab, an appraiser for Pacific Valuation Group in Oregon, said that professional organizations and regulators have so far not been able to fix the industry’s problems.
“Industry associations have not been effective in countering the problems. Regulators at the state level are constrained by budgets,” he said.
Ahdab also said that other industries, such as the lending, mortgage and real estate brokerage industries, must step up their standards. And, he said, “state appraisal boards, some of which don’t have teeth, should work toward stricter enforcement and, just as importantly, work with the state government agencies regulating lending and real estate sales activity.”
In October, housing and real estate industry and regulatory officials presented congressional testimony about the problem of predatory lending, with some testimony relating to appraisers’ role in artificially inflating home values for the purpose of mortgage fraud.
Bill Apgar, a former Federal Housing Administration commissioner and an advisory board member for AMCO, an independent valuation management company, said that these congressional hearings called attention to appraisal industry problems, and it’s only a matter of time before there is better enforcement of laws that are already on the books.
“Eventually they’re going to lower the boom. First and foremost you’ve got to have people honor the legislation that’s there. There is a compliance problem, and regulators take it seriously,” he said.
“Virtually everybody would like to see (the system) fixed,” Apgar said, though he acknowledged that the enticement of people to cheat is enormous. A successful solution will be one that does not tie up the current lending process, he added. “The first thing is going to be a push to make the current systems work.”
Representatives for other industry groups say appraisers should take responsibility for their own actions.
Bob Armbruster, president of the National Association of Mortgage Brokers, said appraisal inflation would not be an issue if appraisers did their jobs as required by law. “The act of appraisers inflating the home above home values is wrong, it’s dishonest. Consumers are the people who get hurt with the over-inflation,” he said, adding, “any housing industry person who puts pressure on appraisers to inflate the value should be held accountable.”
Armbruster said, “I’m aware (appraisal inflation) is being done because I’m being asked about it on occasion.” But he said he hasn’t heard that appraisers worry they might lose business if their appraisals don’t meet certain values expected by clients, nor has he heard the complaint that appraisers are in some cases not paid if the appraised value of a property does not meet their clients’ expectations. “That’s a little bit surprising,” he said.
The mortgage broker association’s code of ethics doesn’t specifically address mortgage broker conduct with appraisers, he said.
Steve Cook, a spokesman for the National Association of Realtors, said the Realtor Code of Ethics “clearly states NAR’s position on appraisal services. It addresses issues faced by Realtors who are appraisers and how Realtors should treat appraisal providers.”
And Tim Doyle, director of government affairs for the Mortgage Bankers Association of America, said, “reputable lenders do not engage in pressuring appraisers to violate (federal standards) and meet pre-determined targets because lenders can suffer significant financial loss when fraud is discovered.”
He added, “I believe the real problem from a loss perspective that our members see situations where an unscrupulous appraiser is working with some other unscrupulous industry insider to commit serial fraud on a number of transactions for profit.” This sort of “fraud for profit” activity is more damaging than appraisal inflation that is caused by pressure, he said.
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