Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, September 17, 1993 TAG: 9309290298
SECTION: EDITORIAL PAGE: A13 EDITION: METRO
SOURCE: BERNARD J. FOUNTAIN
DATELINE: LENGTH: Long
No one ever said that cleaning up after the savings-and-loan mess would be easy. But one might have assumed that federal agencies charged with regulating the nation's banks and thrifts would not so soon repeat past mistakes. Yet, banking regulators, with the blessing of the Clinton administration, have mistakenly concluded that the need for professional, independent appraisal of residential property values somehow conflicts with the need to streamline burdensome banking regulations.
In their misguided effort to provide relief to America's financial institutions, these regulators propose to remove upwards of 90 percent of home mortgage transactions from the scrutiny of a state-licensed or -certified appraiser.
Who then would be responsible for determining the fair market value of most residential property? The answer could easily be someone within the very bank or thrift that is doing the lending, a situation that all but invites fraud and abuse.
Before I detail the pitfalls of this foolhardy scenario, some history is in order.
Under the banner of regulatory reform, the Reagan administration eased many restrictions on banks and S&Ls.
In this deregulatory atmosphere, many lenders regarded an appraisal as a mere formality, necessary but meaningless paperwork or a rubber stamp, not a vital safeguard against making unsound loans.
Faulty appraisals were performed on some property by untrained, inexperienced people who overinflated real-estate values. Some appraisers were more responsive to the banks that hired them than to a code of professional ethics. Later, overvalued properties on the books of banks and thrifts caused serious losses when defaults occurred, and the financial institutions could only recoup a fraction of the loan amount.
The combination of loose regulation and no uniform standards for appraisal professionals was part of the recipe for economic disaster.
A House subcommittee reported in 1985 "that appraisal abuses and deficiencies have, in varying degrees, contributed to hundreds of millions of dollars in losses, hundreds of weakened and/or failed institutions and hundreds of enforcement actions." Between 1981 and 1984, House investigators discovered that Fannie Mae and Freddie Mac - those quasi-governmental agencies that invest in home mortgages - experienced "significant appraisal problems and associated losses." In just one nine-month period, for example, Freddie Mac forced 70 participating lenders to repurchase more than 300 mortgages for unacceptable, inadequate or missing appraisals - at an estimated cost of $15.2 million. And when Fannie Mae sold 4,307 properties acquired through default, the aggregate sales price was $63.2 million less than their original appraised value.
To remedy this deteriorating situation, Congress enacted appraisal-reform legislation in 1989, setting up a system to require appraisers to satisfy educational and experience standards. Appraisers currently perform their work subject to state enforcement and industry standards.
The Appraisal Institute, along with consumer groups, mortgage insurers and secondary market investors, fought for these reforms and applauded their enactment. Today, we are appalled that federal regulators would undermine reform before it has even had a chance to work.
The purchase of a home is, for most consumers, the most important financial transaction they ever make. Yet the $250,000 threshold proposed by the regulators denies the benefits of appraisal reform to an estimated nine of every 10 home buyers. It denies them protection from paying a price for their home unjustified by the market. It makes them vulnerable to shady practices by some lending institutions single-mindedly pursuing loan-origination fees and other up-front payments regardless of the consequences.
For taxpayers, the $250,000 threshold threatens to bring back some of the nightmares of the S&L crisis. An Institute for Strategic Development study found that small dollar loans backed by faulty appraisals can, in the aggregate, pose significant portfolio risk even to large financial institutions. With virtually all of a bank or thrift's home-mortgage portfolio and a large percentage of commercial loans at risk of being improperly appraised, we could see an increase in bank and thrift failures, and even another taxpayer bailout.
For banks and thrifts, this high threshold relieves no burdens and provides no benefits. Use of a licensed and certified appraiser better protects their portfolios.
The Savings & Community Bankers of America, in its comments to the federal regulators, argued that it would be the institutions most inclined to make risky loans that would take advantage of a lower threshold. "We can envision prominent advertisements proclaiming: 'NO APPRAISALS REQUIRED! Loans up to $250,000 - NO APPRAISAL FEES.'"
These community bankers know the value of good appraisals and do not want to do anything to weaken their underwriting process.
Unfortunately, other banking groups do not agree. They have argued to federal regulators that the current appraisal rules are causing needless expense and needless delays for home buyers and small-business people because of a shortage of qualified appraisers.
However, these arguments are just plain wrong.
The cost of an appraisal is only a very small part of the total fees and costs associated with a real estate transaction. And the current system doesn't increase costs. A survey by the Consumer Federation of America indicates that appraisal costs have not risen. Further, the supply of licensed and certified appraisers is plentiful - the latest count is nearly 80,000 and increasing. In fact, new licensing procedures "should spur an increase in the supply of appraisers, helping to reduce prices," says the Institute for Strategic Development.
The $250,000 threshold is not regulatory relief; it's regulatory recklessness. Homeowners, taxpayers and responsible financial institutions should join with the Appraisal Institute in demanding a withdrawal of this damaging proposal. If the federal regulators don't regain their senses, Congress should act swiftly to save them from their reckless appeasement of the institutions they are charged with overseeing.
\ Bernard J. Fountain is president of the Appraisal Institute, a professional organization based in Chicago that advances appraisal reform.
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by CNB