This is the dirty secret hiding in the national foreclosure crisis. At virtually every place in the system where oversight or stricter policing of risky or dishonest practices might have protected consumers, those protections evaporated.
Consider appraisers. As the Associated Press' Mitch Weiss reported in Tuesday's Observer, bumbling enforcement and ineffective punishment for rogue appraisers allows cheats to go unpunished.
Almost half the states, which are supposed to regulate property appraisers, are violating federal rules by not investigating and resolving complaints within a year. Sometimes that's because state boards that license appraisers and investigate complaints are chronically understaffed. Regardless of the reason, it means dishonest appraisers stay in business, able to victimize even more people.
How do appraisers fit into the foreclosure crisis? Here's how. Lenders rely on appraisers to confirm that a property is worth at least as much as the mortgage loan. That protects the homebuyer (the borrower) and the lender, because if the borrower can't pay, the home can be resold to repay the lender.
If an appraiser inflates the value of a house, the buyer pays more than it's worth. That raises sales commissions for mortgage brokers and real estate agents, and if it's a new subdivision the builder makes more money, too. But if a buyer needs to sell – or if a lender has to foreclose – the house may not be worth as much as the mortgage loan, especially if property values are stagnant or falling.
Intentionally overstating the value of a home on an appraisal is illegal. Even so, some appraisers say they're pressured by real estate agents or mortgage brokers to inflate values. “They're all doing it. It's hard to stay honest,” Cherryville appraiser Ray Haynes told the AP. The AP said hundreds of appraisers have complained to federal and state agencies about fraudulent inflation of property values. Bob Ipock, a Gastonia appraiser who reviews other appraisers' work for lenders, has testified before the N.C. General Assembly that he believes appraisal inflation is a major problem in North Carolina.
Yet since 1994 only 13 appraisers have had their licenses yanked by the N.C. Appraisal Board.
In North Carolina, the AP found, of more than 300 consent orders filed since 1994 involving complaints against appraisers, 65 percent involved mistakes that inflated a home's value. Yet Philip Humphries, director of the state appraisal board, said most complaints were frivolous. That attitude lets rogue appraisers continue victimizing consumers. Mr. Humphries should start taking seriously his job to protect the public from cheaters.
Clearly, appraisers aren't to blame for the whole foreclosure crisis. Some people ignorantly or recklessly bought houses they couldn't afford. But evidence shows plenty of fraud, too: Buyers were misled or lied to about what they'd have to pay. Loan documents were falsified, sometimes without buyers' knowledge. And dishonest appraisals were part of the whole shameful mess.
It's time for state appraisal boards – including North Carolina's – to get to work being watchdogs protecting consumers. Right now, they're failing at that role.