Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I take license with our law.
Ok, admittedly that post title is a bit dramatic and I am not against appraisal licensing at all. However, I do not believe that licensing alone protects the public from bad appraisers. The same concept applies to appraisal designations. Licensing only one tool for the protection of the consumer, investors and financial institutions.
Take a look at this New York Times article of 1990 called Reappraising the Appraisal Industry.
”THE party is over,” said Eugene Albert, a real estate appraiser. ”The binging of the 1980’s is finished.” Mr. Albert was discussing the excesses that characterized the 1980’s real estate market and led to a recent law requiring state certification of real estate appraisers.
”Many of the bad loans made by the banks in the S.&L. disaster were sanctioned by unscrupulous or untrained appraisers,” he said. ”Even some bank lending officers here in the county, in their frenzy to make loans, would call my office and say, ‘I want an X dollar value of this property, can you give it to me?’ Our firm lost business because we wouldn’t cooperate, but there were appraisers that did. And that’s why state certification is important. It will prevent shoddy appraisal practices.”
Does this summary sound familiar? Its nearly the same situation as we have today. Appraiser clients pressure appraisers to achieve the needed result.
The real estate correction of the late 1980’s led to appraisal licensing in 1991 which was supposed to fix the problem of inflated appraisals. Yet mandated appraisal licensing made the quality of appraisals worse. Why?
- A larger unethical element entered the profession because the barrier to entry was actually lowered by licensing. Approved classes, often placeholders for time, and took on the feel of diploma mills making it easy to get qualified.
- Licensing cut membership in appraisal organizations severely (and I mean severely), which weakened an already weak lobbying presence in Washington DC (compared to NAR, NAHB, MBA and other real estate related trade groups).
- The growth of mortgage brokers as a source of origination allowed them to select “good appraisers” who were also licensed.
- Appraisal firms were able to skirt around the spirit of the law by hiring armies of trainees to crank out reports.
- There was a sense of “job done” by government officials when the law passed that appraisal quality would be better from implementation of the laws.
- Licensing made it easier to sue competent appraisers falsely, driving up malpractice insurance, placing greater financial pressure on appraisers.
The inability of the profession to communicate the problems with pressure while it was happening was very frustrating to those who recognized it as a serious problem. Very few understood the problem until the subprime mortgage mess became part of the national vocabulary.
If appraisers are not insulated from pressure, all the laws in the world will not allow them to be honest. Place a hungry person in a grocery store and see how long it takes for them to steal food.
Appraiser licensing alone is not the solution. Licensing is merely a tool to aid government in regulating the profession, primarily as a source of revenue. It doesn’t solve the problem of protecting the public and the financial system from inflated values. Does the public want an appraisal regulator mandate how big of an adjustment should be made for a view?
Now that many housing markets are seeing declining prices, its even more important that appraisers are able to perform their duties free from pressure.
Here are some thoughts in formulating a solution to the problem.
- Clearly define what appraisal pressure is in legal terms and make it criminal to pressure an appraiser.
- State appraisal license fees collected should be fully directed to appraisal regulatory departments so they can be fully funded and staffed.
- Install a Federal regulatory wall between underwriting and sales functions in lending institutions, including mortgage brokers. Anything less than this should be disclosed as a potentially biased collateral valuation. This would affect pricing of mortgage pools.
- Lending institutions should be required to maintain formal appraisal panels that are reviewed annually for quality by underwriting personnel, not sales personnel.
- Allow appraisers to file anonymous formal complaints to their state agencies when pressure is applied without fear of retribution (ie whistleblower laws). Those whistleblowers are held to a high standard for proof in order to avoid nuisance actions.
For goodness sakes, let the appraiser be a professional and appraise the property. If the lending industry does not care what the value of the collateral is, then lets do away with the profession or call us something else, like “form-fillers.”
Of course, investors in the secondary markets would continue to be reluctant to buy mortgage paper because they don’t know what they are buying.
Instead of relying exclusively on licensing, lets figure out who, what and why we are appraising.