Bill to License Appraisers Is Set for Vote

The state Assembly is expected to vote this week on a bill that would require many of California’s estimated 25,000 appraisers to be licensed, as lawmakers try to prevent a potentially serious disruption in the popular FHA, VA and Farmers Home Administration loan programs across the state.

The legislation comes as the appraisal industry is drawing increasing fire, in part because appraisers in California and many other states are virtually unregulated and are not legally required to prove their competence or skill to go into business.

“All it takes to be an appraiser in California is to print up some business cards and hang out a sign,” said Department of Real Estate Commissioner James A. Edmonds Jr., whose agency would oversee appraisers if the bill becomes law.

The measure, introduced by Assemblyman Thomas M. Hannigan (D-Fairfield), would create a two-tier system for licensing and certifying appraisers. Under the program, appraisers would be required to take state-approved courses and pass an exam before they could go into business.

The bill was prompted by actions by the federal government that threaten to seriously disrupt lending activity in California and other states where appraisers are not licensed or certified.

The federal Office of Management and Budget said last fall that beginning July 1, 1991, all properties financed through a variety of federal loan programs would have to be appraised by either a licensed or certified appraiser.

Because appraisers are not licensed in California, the OMB’s edict threatens to shut down or seriously disrupt the low-down-payment loan programs offered by the FHA, VA and Farmers Home Administration across the state.

Supporters of Hannigan’s licensing measure say it could prevent a near-shutdown of the loan programs, produce better-educated appraisers and provide government oversight in an industry that previously has had none.

Critics--including many appraisers--say it would not do enough to ensure more accurate appraisal reports and that it will allow some of the most incompetent individuals to keep working in the field.

“If you really want to get tough with the appraisal industry and increase professionalism, this bill just won’t do it in its present form,” said Sara Schwarzentraub, a La Mesa appraiser who heads a coalition of eight different appraisal organizations seeking tougher standards in the bill.

Nearly every American is affected, sooner or later, by the appraisal industry and the quality of appraisers.

For example, the reports are used to determine whether a home buyer gets a loan or an existing owner is able to refinance. Appraisers are often asked to determine how much a home is worth during divorce cases, how much money a property owner must pay to the tax collector and even how much cash the government must pay when it takes a person’s land through eminent domain.

Congressional studies have found that faulty appraisals have also been a prime factor in the growing number of bank and savings and loan failures--a problem that could ultimately cost taxpayers more than $100 billion to remedy.

But despite the importance of their jobs, appraisers in California and several other states have largely been able to operate with little governmental supervision.

Unlike real estate agents, mortgage brokers, termite inspectors and most other real estate professionals, the state does not require appraisers to be licensed. They do not need to demonstrate any knowledge about the property-valuation process or even take courses designed to learn evaluation techniques.

Professional Organizations

Many full-time appraisers say this lack of regulation and testing has drawn too many inexperienced operators seeking a fast buck, and the resulting troubles that their poor appraisals create--from bad real estate investments to insolvent lending institutions--have hurt consumers, the economy and appraisers’ public image.

To counter those problems and improve their skills, thousands of appraisers have voluntarily joined professional organizations that require members to meet certain standards, pass exams and take several educational courses.

Many of those same groups also have called for more regulation of their industry and strict licensing programs to weed out the relatively few appraisers who are incompetent or dishonest.

Although those calls have sometimes led to the introduction of such measures in the state Legislature, the bills never got far because they were often opposed by more powerful real estate interests.

Played Key Role

The influential California Assn. of Realtors, in particular, has traditionally opposed licensing of appraisers and has played a key role in beating back such efforts.

In the past, realtors have publicly explained their opposition by claiming that licensing would do little to stop fraud in the appraisal and lending business.

Privately, however, some CAR leaders have said they believe that more regulation of appraisers is needed and that licensing might not be such a bad idea.

But they also complained that they were forced to oppose any licensing proposal because many of the trade group’s own members supplement their incomes by doing appraisals on a part-time basis and do not want to bother with a licensing program.

Ironically, realtors themselves are now calling for licensing and additional regulation of appraisers to avoid disrupting the mortgage market when the federal licensing and certification guidelines go into effect in 1991.

Needs Implementation

“If we don’t come up with a licensing program, we’d definitely lose the FHA, VA and Farmers Home Administration programs,” said Richard Rosenthal, a Venice broker who helped to shape the licensing measure now in the state Assembly.

State legislation creating a program to comply with the federal edict would have to be approved this year to take effect by 1990. It would then take about a year to implement the program, said Edmonds, the state real estate commissioner.

“When you consider the time it would take to get a bill through the Legislature, signed by the governor and finally implemented, you’re close to bumping up against the federal deadline,” Edmonds said.

Adding an extra dose of urgency to the state’s efforts to design a licensing system are two congressional bills designed to bail out the ailing Federal Savings & Loan Insurance Corp., the loss-plagued government agency that provides insurance on deposits at the nation’s savings and loan associations.

Bring to a Halt

As part of the proposed bailout plan, the appraiser-licensing requirements for the FHA and other federal loan programs would be extended to cover nearly all mortgage loans in an effort to bring more conformity to the appraisal industry and, lawmakers hope, improve the quality of appraisals in the process.

Such an extension could theoretically bring mortgage-lending in California to a halt if the state does not have an appraiser-licensing program in operation by 1991. But experts say a complete lending shutdown is unlikely--even if no licensing program is approved--because it would throw the housing market into chaos.

“If worse came to worst, we could ‘import’ appraisers from states that have licensing schemes, or California appraisers could go out of state and get licensed,” Rosenthal said.

“But the California market is so large that there still wouldn’t be enough appraisers to go around. It would cause a huge disruption in our market--and that’s one more reason why we need to set up a licensing program here.”

Jumped on Bandwagon

It is the threat of such a disruption--and the millions of dollars in lost sales commissions that would result--that prompted the realtors group to jump on the appraiser-licensing bandwagon.

In fact, CAR is sponsoring the Hannigan bill, which would create a two-tier system for licensing and certifying appraisers.

The first tier would consist of real estate brokers and licensed real estate appraisers. To get an appraiser’s license, an applicant would have to take 60 hours of state-approved courses--including a 15-hour class on standards of professional practice and ethics--and then pass a test.

The second tier would have more rigorous requirements. To become certified, an appraiser would have to take an additional 15 hours of classes, have a minimum of two years of recent appraisal experience and pass a more difficult test.

It is the first tier that is causing the most problems between some realtors and appraisers.

Take Appraisal Courses

Since brokers are already required to take one 45-hour class in real estate appraisal and must answer appraisal questions on the exam to get their broker’s license, the CAR-backed bill would allow brokers to continue making appraisals without applying for an appraisal license.

The only limitation would be that the brokers could not call themselves “appraisers” unless they are licensed.

Full-time appraisers, on the other hand, would be required to take all the course work to become licensed and continue to make appraisals. However, the real estate commissioner could waive most of the course work requirements if an appraiser had previous schooling that met certain criteria.

The provision that allows brokers to continue evaluating properties without meeting the licensing standards worries some full-time appraisers and angers others. Many of these appraisers say it is brokers who cause many of the problems in the appraisal industry because appraising isn’t their full-time business.

“Brokers should have to meet the same standards that we meet, but the bill would pretty much let them completely off the hook,” said Schwarzentraub, who leads the group of eight appraisal organizations that calls itself the California Coalition of Appraisers.

Claim Interest Conflict

Schwarzentraub and some of her fellow appraisers would particularly like to see brokers take the 15-hour course on appraisal standards and ethical conduct.

Appraisers say brokers often face an inherent conflict of interest when they do appraisals.

For example, if a broker is doing an appraisal on a home in a neighborhood where he also has a listing, there may be a tendency to inflate the home’s estimated value to make the community appear to be appreciating rapidly and also make the home he is trying to sell look like a “bargain.”

Hannigan’s bill “would continue to let thousands of brokers continue to do appraisal work without having a license,” said Schwarzentraub. “Given their inherent conflict of interest, I don’t see how the bill would protect the public from faulty appraising.”

Alex Creel, the California Assn. of Realtors’ chief lobbyist, said such concerns are unfounded.

Code of Ethics

“Who says appraisers have cornered the market on ethics?” Creel asked. “You can’t be a member of CAR unless you pledge to uphold the National Assn. of Realtors’ ethics code, and I’d think the code would preclude you from appraising a property you have an interest in.

“The fact is, brokers are the only ones who have been required to take appraisal courses over the years--you need at least 45 hours of appraisal classes in order to get your broker’s license. The bill would recognize that fact and give the realtor some credit.”

Bert Thornton, president of the Southern California chapter of the American Institute of Real Estate Appraisers and a Pasadena appraiser, is not worried about realtor ethics.

Instead, he is concerned that allowing brokers to do what essentially amounts to an appraisal, even if they do not have a license, could violate the purpose of the pending federal legislation, which would require virtually all appraisals to be done by a licensed or certified practitioner.

“If brokers don’t have to get a license before they do an appraisal, California might not be in compliance with the federal requirements,” Thornton said.

As a result, he said, mortgage-lending in California may slow to a trickle by 1991 even if the state Legislature passes the appraisal bill and begins a licensing program. “We might wind up right back at square one,” Thornton said.