As a former civil servant, I have often been witness to the ineffectuality of the federal government in its response to problems of national importance.
For instance, as a combatant in the "War on Hunger," I worked under the political appointee who proclaimed ketchup to be a vegetable.
Now, as a real estate appraiser facing federally mandated licensing and certification requirements, I am again witnessing what promises to be an impractical, ineffectual response to a national problem.
The "problem," as described by "The Barnard Report" of the House subcommittee on commerce, consumer and monetary affairs, is this:
"Hundreds of savings and loans . . . have been severely weakened or declared insolvent because faulty and fraudulent real estate appraisals provided documentation for loans larger than justified by the collateral's real value. . . . Of greatest concern is 'client advocacy appraising,' wherein large numbers of appraisers willingly agree, or otherwise succumb to pressure brought to bear by lenders, borrowers, and others involved in the loan origination and underwriting process."
More simply, our system has been operating without the checks and balances to guarantee objective and accurate appraisals.
Developers and mortgage loan borrowers put pressure on appraisers to increase the appraised value of their collateral so they can borrow more. What has evolved is a group of "developer's darlings" who manipulate appraisals to hit target values.
The Office of Thrift Supervision now counteracts this by requiring thrift institution appraisals to be solicited by lenders, not borrowers.
Commercial banks have not yet been required to do the same, although such a rule has been proposed. One bank's chief review appraiser confided to me that about 80% of the borrower-solicited appraisals he reviewed were biased.
Lenders too can corrupt appraisers.
The mortgage lending business has become fiercely competitive, with loan agents required to make ever more loans or face loss of income, employment or career advancement.
Loan agent compensation based on commissions exacerbates the problem. Hefty loan origination fees can also be collected before selling a bad loan to a third party. Herein lies the pressure on appraisers to produce values that "support the deal."
