Faulty Appraisals Cited in Huge Lending Losses

California isn’t alone in its concerns about real estate appraisals.

A recent study by the Federal Home Loan Bank Board, used as partial justification for adopting tougher appraisal guidelines, found some serious problems caused by faulty or fraudulent valuations. Some of those findings are:.

--Between January, 1983, and October, 1985, substantial appraisal deficiencies were found in the real estate loan portfolios of about 25% of the nation’s federally insured savings and loan associations. The questionable appraisals overvalued the real estate used as collateral for the loans by an estimated $3 billion.

--Many of the problems at Continental Illinois National Bank, which was bailed out for a record $4.5 billion by the Federal Deposit Insurance Corp. in 1984, stemmed from bad real estate loans. Twenty-one of the bank’s biggest properties originally were valued at a total of $518.4 billion, but later appraisals found them to be worth only $184 million.

--Two of California’s biggest lenders--Bank of America and Wells Fargo Bank--along with Continental Illinois--”have experienced combined appraisal-related losses . . . that are expected to exceed $300 million.” The loans, however, do not threaten the institutions with insolvency.

--As much as 40% of the Veterans Administration’s $420 million in 1985 losses from loan guarantees resulted from inaccurate or dishonest appraisals.

--In 1985, the Federal Housing Administration’s mortgage-insurance program lost more than $200 million, and a large portion of those losses were caused by “faulty and fraudulent appraisers.” In that same year, the FHA instituted 1,200 disciplinary actions against its 5,000-member pool of approved appraisers.

--”Major appraisal problems and abuses” were the primary culprit in the failure of Community Savings & Loan of Maryland in late 1985. The failure helped trigger the temporary closing of all Maryland thrifts and prompted their conversion from private to federal insurance.

The tougher appraisal guidelines adopted by the Bank Board must be followed by all lenders whose accounts are insured by the Federal Savings and Loan Insurance Corp. The program does not apply to other banking institutions.