Would Licensing Improve Appraisal Quality?

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.”

Another problem besetting the appraisal profession is “assembly-line appraising,” in which appraisal reports lacking adequate research and analysis are hastily assembled by otherwise competent appraisers or their subordinates so as to maximize turnover and profits.

This form of negligence is often mistaken for “incompetence.”

Given this unsatisfactory status quo, the federal response is that each state “register, license, and . . . certify” real estate appraisers, requiring appraisers to demonstrate competence by passing examinations.

Yet “The Barnard’s Report’s” central concern seemed to be appraiser misconduct rather than incompetence. Extensive testimony divulged that many appraisers involved in thrift failures held the highest credentials recognized by the appraisal profession.

Many acts of appraisal incompetence, too, are actually acts of negligence or laziness by qualified appraisers who could easily pass an examination. Examinations will thus require all fraudulent and negligent appraisers to demonstrate competence before they can continue their destruction of our nation’s financial institutions.

The other advantage of licensing, we are told, is that licenses can be revoked for misconduct. This fear of revocation will supposedly give appraisers the same incentive to behave as properly as other licensed professionals, such as real estate agents, securities dealers and attorneys. God help us all!

Many forget that some of the states hardest hit by appraiser misconduct, such as Texas and Florida, have for years required appraisers to have real estate licenses.

A recent Wall Street Journal article focusing on Texas appraiser corruption noted that the abuses were not curbed until federal regulators successfully prosecuted or sued some appraisers.

The reported consensus among Texas appraisers was that the federal actions have now made them “extremely conservative in their estimates.” It was the fear of fines or incarceration, not the loss of a license, that cleaned up the profession in Texas.

Moreover, state licensing law enforcement would actually divert scarce enforcement resources away from the prosecution of appraisal fraud. In Florida, appraisers have been jailed, not for fraud, but for practicing without a Florida real estate license, even if they had licenses from other states.

Does occupational licensing work?

The American Enterprise Institute for Policy Research reported in 1980 that the consensus of scholarly literature on the subject was that the public interest defenses for occupational licensing were generally of questionable merit, and the improvement in the quality of service was debatable.

The benefits of licensing extended mainly to licensees by raising the cost of entry into a profession, restricting the supply of professionals, thereby increasing their earnings. Licensing systems end up protecting the profession rather than the public.

Licensing was also found to stifle professional innovation, something appraisers need to respond to an increasingly complicated and sophisticated real estate investment marketplace.

Proponents of appraiser certification, the next step beyond licensing, envision a system similar to the public accounting profession, wherein “certified appraisers” would have status akin to CPAs, not necessarily ideal role models.

Recent scandals have shown the limitations of “Big Eight” auditors in uncovering and reporting unsound corporate financial conditions. The same weakness of the proposed appraiser regulatory system parallels that of the public accounting profession, namely the conflict of interest stemming from an agent-client relationship. Accounting firms often find it difficult to bite the hand that feeds them.

Another problem with regulating appraisers is who will do it. Can each state come up with impartial and effective licensing/certification boards, or will politics prevail?

Special-interest lobbying and discord has already been intense.

Realtors’ associations particularly want to rule appraisers so as to provide employment opportunities for their own members, but can realtors provide objective opinions of value while simultaneously selling, leasing or managing their clients’ properties?

Although this conflict of interest already exists at many full-service real estate firms, why put foxes in charge of the henhouse?

Admittedly, appraiser licensing/ certification is not harmful, either, but it is also not the panacea it is envisioned to be by its congressional architects, because it does not provide sufficient incentives for appraisers to be honest and diligent.

As the eyes of the nation are upon Texas with respect to appraiser misconduct, so can we observe a more effective solution to the problem--increased federal investigation and enforcement--which has already scared the Texas appraisal community into good behavior.

It seems that the two emotions prevailing in the real estate business are greed and fear. The latter goes far in combatting the former.