As soaring home prices set the stage for America's housing meltdown, a critical step in making sure those home sales were a fair deal – the real estate appraisal – was undermined from within.
Twenty years ago, after the nation's last major banking crisis, Congress set up a system to catch rogue appraisers.
Their game: inflating home values at the direction of unscrupulous real estate agents and mortgage brokers, whose commissions are determined by the size of the deals.
But a six-month Associated Press investigation found that the system is crippled by bumbling enforcement and ineffective punishment for fraud.
And despite ample evidence appraisers are pressured into inflating home values – sometimes to prices in support of loans that are more than buyers can afford – the federal regulators charged with protecting consumers have made a conscious choice not to act.
“The system is completely broken,” Marc Weinberg, a retired official at the federal agency charged with monitoring the appraisal industry. “It's amazing that the system ever worked at all.”
Dozens of interviews and thousands of state and federal documents reveal that:
Since 2005, at the height of the housing boom, more than two dozen states and U.S. territories have violated federal rules by failing to investigate and resolve complaints about appraisers within a year. Some complaints sat uninvestigated for as long as four years. As a result, hundreds of appraisers accused of wrongdoing remained in business.
The only tool federal regulators have to force states into compliance is so severe – it would effectively halt all mortgage lending in a state – that it has never been used.
State appraisal boards and the federal agency charged with overseeing them are chronically understaffed, many with only one full-time investigator to handle the hundreds of complaints that arrive each year.
Some don't even have an investigator.
“The appraisal reforms of the late 1980s were good reforms,” said Susan Wachter, a real estate professor at the University of Pennsylvania. “But they were not sufficient to prevent what we have seen … because regulation without teeth is not regulation.”
There are many causes of the housing crisis – lenders who allowed people with spotty credit to buy homes, mortgage brokers who focused on selling loans without regard to the borrowers' ability to repay, investment bankers who bought and sold risky mortgage-backed securities. A few of the worst offenders – appraisers included – have been put behind bars.
But experts and industry insiders believe the failure to effectively monitor the real estate appraisal industry contributed to housing's collapse.
Appraisers feel pressure
This is how the system is supposed to work:
Typically, an appraiser receives an order from a real estate agent, lender or mortgage broker to inspect a property. Based on a home inspection and comparable sales, the appraiser develops an estimated value for the property. Banks use that figure to set the home's value as collateral for the mortgage loan.
Appraisers are supposed to come up with a value free of any outside pressure. But more than three dozen appraisers nationwide interviewed by the AP said they often felt pushed by a real estate agent or mortgage broker to fraudulently inflate a property's value. They supplied documents from lenders asking them to “hit a number.”
“The higher the loan amount, the more money brokers and lenders make,” said Ray Haynes, an appraiser from Cherryville. “And they threaten you. They say, ‘If you don't play ball with us, we'll go somewhere else.' And they do. I've seen my business shrink. They're all doing it. It's hard to stay honest.”
Documents also show that hundreds of appraisers complained to federal and state agencies about fraudulent inflation of property values.
The appraisal system has broken down before. In 1989, amid the savings and loan crisis, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act.
Under the law, a private group known as the Appraisal Foundation wrote the rules governing appraisers. The law also recommended that states begin licensing appraisers and disciplining those who break the rules.
The Appraisal Subcommittee, an independent federal agency that answers to Congress, would conduct field reviews and audits, and maintain a national registry of appraisers.
But problems plagued the system from the start. It took years for some states to set up the independent review boards to supervise appraisers or hire personnel to investigate complaints. Even today, eight states still do not require appraisers to obtain a license or certification.
“We got to this point by a lack of enforcement. … The public has the right to expect the appraisal boards are taking care of that problem,” said Bob Ipock, an appraiser from Gastonia who is a critic of the current system. “And they are not. They're looking the other way.”
The Appraisal Subcommittee is supposed to help states remove from the system those appraisers who agree to “hit a number.” But it has only four employees to conduct field reviews and audits of 50 states and four U.S. territories.
Only punishment too drastic
When the agency does find a state failing to follow the law, the only tool available to force compliance is “non-recognition” – a penalty that would ban all appraisers in that state from handling deals involving a federal agency.
“Do you know what that would have meant? The net effect is it would have effectively shut down mortgage lending in that state,” said former subcommittee director Ben Henson. “To take that action would have been an unbelievable disruption to the economy. I wasn't going to do that.”
When field reviews began in the 1990s, states were repeatedly warned they were failing to comply with the law – warnings that continue to this day. But without the ability to issue fines or impose a less destructive punishment, the Appraisal Subcommittee is powerless. It has never taken any action against a state for not obeying the law.
And so, the violations stack up year after year, largely without consequence.
In the last three years alone, as the nation's housing market went from boom to bust, 27 states or territories failed to investigate and resolve complaints within a year.
In Washington, D.C., the agency found last August that 32 of the district's 35 pending cases were older than two years. In Florida, almost 50 percent of 169 cases older than a year concerned appraisers involved in “fraud and flipping.”
The flaws in the system also allow appraisers to stay in business while complaints against them are under investigation. North Carolina appraiser Jerry Gooden had eight complaints filed against him between 2001 and 2003, all related to a trainee who performed dozens of appraisals under his supervision and later pleaded guilty to mortgage fraud.
All the while, Gooden remained listed in good standing on the Appraisal Subcommittee's Web registry of appraisers. His license was suspended in 2005 for nine months because of the complaints. But even today, his entry shows he's never been disciplined. When contacted recently by telephone, Gooden said he was busy and didn't have time to talk.
Complaints left unresolved
Records obtained by the AP also show that complaints about individual appraisers filed at the state level are left unresolved for months – and often for years – but for a different reason: Many states have only one full-time inspector. Some appraisal boards also are rolled into bigger regulatory agencies, where inspectors with little or no experience are assigned to investigate complaints.
“I think the design of the system is excellent,” said Philip Humphries, the current director of the North Carolina Appraisal Board. “But states don't have the money to hire personnel to carry out what the system was designed to do.”
Henson said most of the complaints are frivolous, involving consumers upset because an appraiser “may have been rude or said my house wasn't worth as much as I thought.” He said few of the complaints have anything to do with inflated appraisals. “That was just not a problem,” he said.
Filed complaints are considered private and are not open to public inspection. But consent orders are public, and the AP's investigation found that Henson's assessment that most complaints are frivolous is simply wrong. In North Carolina, for example, of the more than 300 consent orders filed since 1994, 65 percent involved mistakes that inflated a home's value.
Even when states do investigate and find problems, rogue appraisers are rarely disciplined.
Since 1994, only 13 appraisers – there are currently about 3,500 licensed appraisers in the state – have had their licenses taken away by North Carolina's appraisal board. During the same period, California, the nation's most populous state, revoked 89 licenses; Tennessee, West Virginia and Wyoming did not revoke any, according to Appraisal Subcommittee records.