Better Oversight for Appraisers

In the ongoing aftermath of the subprime crisis, attention has turned to real estate appraisers and what role they might have played in the turmoil.

In the classic novel Lord of the Flies, a group of young boys lose touch with the conventions of society when they're stranded on an island without supervision. A similar phenomenon may have befallen some real estate appraisers who, without adequate regulatory oversight, appear to have forgotten that appraisals are supposed to be objective.

Mortgage lending bullies

A 2007 survey conducted by October Research indicates that up to 90 percent of appraisers have felt pressured by lenders, brokers, and real estate agents to adjust property values. Typically, this happens when a lender representative directly informs the appraiser that the appraisal needs to hit a certain number. That number may be what's necessary to make the transaction happen, or it may be an amount that sufficiently pads the broker's or agent's commission income.

Bogus appraisals may serve the immediate objective of closing the deal, but they cause far greater problems down the road. Lenders end up being overextended on the loan, and borrowers get strapped with payments that are larger than they should be.

Problems rooted in regulatory system  

The Associated Press reported last month that the regulatory systems in place are largely ineffective at catching and punishing unethical appraisers. State agencies are required by federal law to certify and regulate their appraisers. They're also legally obliged to investigate and resolve complaints about appraisers within one year. Even so, some states still haven't established certification procedures, and many have failed to address appraiser-related complaints in the required timeframe. Since complaints have gone unaddressed for months and years, many rebel appraisers, brokers, and agents have been able to continue their illegal business practices without consequence.  

The federal arm of the regulatory system is the Appraisal Subcommittee, which reports to Congress. The Appraisal Subcommittee is supposed to support the states' efforts, while keeping them compliant with federal law.  Unfortunately, the Subcommittee appears to be lacking in human resources; the agency currently has no permanent director, and relies on only four employees to conduct field reviews for the entire country.   

Further complicating the issue is the lack of a realistic enforcement policy. The Appraisal Subcommittee doesn't have the power to fine non-compliant states; its only recourse is to rescind the entire state's authority to handle any deals involving a federal agency. That punishment isn't likely to be imposed, because it would effectively shut off mortgage lending statewide.

Critics say that the problem of unjustly inflated home values can only be solved if the regulatory system is reworked to include a realistic and effective enforcement policy. Appraisers throughout the country need to be reminded that they can't keep making up their own rules like the boys in Lord of the Flies-and they won't get that message until appropriate punishments are enforced.