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Acute Problem : Real Estate Appraisals Under Fire

August 29, 1985|TOM FURLONG and JOHN M. BRODER | Times Staff Writers

Real estate appraiser Basil B. Clements didn't even come close when he estimated the total value of 20 1/2 lots in the Hollywood Hills at $380,500 in late 1980.

It was an appraisal that American Home Mortgage, a Newport Beach real estate investment firm, used as the basis for a $250,000 real estate loan. Today, the loan is in foreclosure, the properties are for sale for $70,000 and American Home Mortgage is being liquidated by a court-appointed bankruptcy trustee.

Clements, whose office is in Orange County, declined comment. "That's all in the hands of the trustee," he said.

The case is only one of thousands of real estate loans made across the country in recent years that have been based on questionable land-value reports. Such appraisals can be found in the problem-loan files of the nation's financial institutions, from the biggest banks to the smallest savings and loans.

Unprecedented Attack

As a result, the largely unregulated real estate appraisal business, for years a safe and obscure way to make a living, is under unprecedented attack.

Intense scrutiny is coming from legislative, regulatory, banking and law-enforcement officials seeking the causes of the problems at financial institutions that have failed or sustained severe losses. And some of the sharpest criticism is coming from appraisers themselves, who say many of their peers are at best incompetent.

The most common complaint is that the appraisal reports--like Clements'--prove far higher than the property's true value. And inflated appraisals coupled with high-risk real estate lending are a sure formula for financial ruin, lending experts say.

The appraisal industry's reach extends into nearly everyone's life. County assessors use appraisers in calculating property tax bills, and people in the midst of divorce often retain them to decide property fights. Competing appraisers are used to settle disputes between government and property owners in eminent domain cases, and many private buyers and sellers of property seek independent opinions of value.

Potential for Damage

But appraisers are most often used by lenders, who need land-value reports to justify their loans on single-family homes, apartment and condominium projects and commercial properties. And it is here that the potential for damage and abuse is greatest.

The problem is particularly acute in California, where bad real estate loans are a major reason why federal banking regulators have taken over eight savings and loan associations since April. The assets of these institutions total more than $11.9 billion.

"Virtually all savings and loans with lending problems are related to fraudulent or inflated appraisals," one banking regulator in California says.

Bad loans underwritten by inflated appraisals slash lenders' profits, cut their stock values and strain deposit insurance funds that are ultimately backed by taxpayers.

"The appraisers are as important as certified public accountants," said Fred Case, a real estate professor at UCLA. "They're dealing with a lender's major assets."

Financial Corp. of America, parent of the nation's largest S&L, found hundreds of inflated appraisals when it recently re-evaluated its loan portfolio and wrote down the value of its assets to market value. In one case, FCA had accepted a $500,000 assessment on a boat dock that turned out to be worth about $5,000.

"We lost a half billion dollars on overvalued property," FCA Chairman William J. Popejoy said, referring to the Irvine-based company's $512-million loss in 1984's fourth quarter. "Most of those appraisals couldn't have been on target, or we wouldn't have lost all that money."

In another case, Dallas County real estate appraiser Larry Wayne Hutson pleaded guilty in April to preparing more than 400 inflated appraisals for several lenders in Texas and Arkansas. Among them was Empire Savings & Loan Assn., of Mesquite, Tex., which was declared insolvent by banking regulators last year and shut down.

A close look at the appraisal industry today reveals several basic problems.

Often Willing Accomplices

By most accounts, it is a fragmented business in which conflicts of interest are a way of life and professional standards apply only to the minority who choose to accept them. As a result, appraisers have too often become willing accomplices in the risky lending against which they are supposed to guard.

To be sure, most appraisers are competent and honest, experts inside and outside the industry agree. Most gain experience in real estate sales or in bank or S&L lending before becoming full-time appraisers, giving them an understanding of property values and of a lender's need for realistic appraisals. The industry's defenders say that no one can accurately predict the fluctuations of the real estate market and that most of the appraisals that look bad now were supportable at the time they were written.

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