Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I take license with our law.

Ok, admittedly that post title is a bit dramatic and I am not against appraisal licensing at all. However, I do not believe that licensing alone protects the public from bad appraisers. The same concept applies to appraisal designations. Licensing only one tool for the protection of the consumer, investors and financial institutions.

Take a look at this New York Times article of 1990 called Reappraising the Appraisal Industry.

”THE party is over,” said Eugene Albert, a real estate appraiser. ”The binging of the 1980’s is finished.” Mr. Albert was discussing the excesses that characterized the 1980’s real estate market and led to a recent law requiring state certification of real estate appraisers.

”Many of the bad loans made by the banks in the S.&L. disaster were sanctioned by unscrupulous or untrained appraisers,” he said. ”Even some bank lending officers here in the county, in their frenzy to make loans, would call my office and say, ‘I want an X dollar value of this property, can you give it to me?’ Our firm lost business because we wouldn’t cooperate, but there were appraisers that did. And that’s why state certification is important. It will prevent shoddy appraisal practices.

Does this summary sound familiar? Its nearly the same situation as we have today. Appraiser clients pressure appraisers to achieve the needed result.

The real estate correction of the late 1980’s led to appraisal licensing in 1991 which was supposed to fix the problem of inflated appraisals. Yet mandated appraisal licensing made the quality of appraisals worse. Why?

  • A larger unethical element entered the profession because the barrier to entry was actually lowered by licensing. Approved classes, often placeholders for time, and took on the feel of diploma mills making it easy to get qualified.
  • Licensing cut membership in appraisal organizations severely (and I mean severely), which weakened an already weak lobbying presence in Washington DC (compared to NAR, NAHB, MBA and other real estate related trade groups).
  • The growth of mortgage brokers as a source of origination allowed them to select “good appraisers” who were also licensed.
  • Appraisal firms were able to skirt around the spirit of the law by hiring armies of trainees to crank out reports.
  • There was a sense of “job done” by government officials when the law passed that appraisal quality would be better from implementation of the laws.
  • Licensing made it easier to sue competent appraisers falsely, driving up malpractice insurance, placing greater financial pressure on appraisers.

The inability of the profession to communicate the problems with pressure while it was happening was very frustrating to those who recognized it as a serious problem. Very few understood the problem until the subprime mortgage mess became part of the national vocabulary.

What now?

If appraisers are not insulated from pressure, all the laws in the world will not allow them to be honest. Place a hungry person in a grocery store and see how long it takes for them to steal food.

Appraiser licensing alone is not the solution. Licensing is merely a tool to aid government in regulating the profession, primarily as a source of revenue. It doesn’t solve the problem of protecting the public and the financial system from inflated values. Does the public want an appraisal regulator mandate how big of an adjustment should be made for a view?

Now that many housing markets are seeing declining prices, its even more important that appraisers are able to perform their duties free from pressure.

Here are some thoughts in formulating a solution to the problem.

  • Clearly define what appraisal pressure is in legal terms and make it criminal to pressure an appraiser.
  • State appraisal license fees collected should be fully directed to appraisal regulatory departments so they can be fully funded and staffed.
  • Install a Federal regulatory wall between underwriting and sales functions in lending institutions, including mortgage brokers. Anything less than this should be disclosed as a potentially biased collateral valuation. This would affect pricing of mortgage pools.
  • Lending institutions should be required to maintain formal appraisal panels that are reviewed annually for quality by underwriting personnel, not sales personnel.
  • Allow appraisers to file anonymous formal complaints to their state agencies when pressure is applied without fear of retribution (ie whistleblower laws). Those whistleblowers are held to a high standard for proof in order to avoid nuisance actions.

For goodness sakes, let the appraiser be a professional and appraise the property. If the lending industry does not care what the value of the collateral is, then lets do away with the profession or call us something else, like “form-fillers.”

Of course, investors in the secondary markets would continue to be reluctant to buy mortgage paper because they don’t know what they are buying.

Instead of relying exclusively on licensing, lets figure out who, what and why we are appraising.


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10 Responses to “[Sounding Bored] Deja Vu: How Licensing Killed The Appraisal Industry As We Know It”

  1. Jose Parrot says:

    The issue is who is the “decider”? I don’t think appraisers will be allowed to make veto proof valuation decisions. Under the current program for mortgage appraisals, the appraiser just gets in the way of the deals. I recommend that buyer/borrowers get their own appraisers and that lenders get their own appraisers. The regulators should use their own appraisers. Also, get rid of the apparent belief by most that the current “Fair Market Price” is the same as the “Fair Market Value”. Lenders, Sellers, and borrowers want the Fair Market Price during a boom and the Fair Market Value during the bust.

  2. Jonathan J. Miller says:

    Thanks Jose – I have to disagree with the buyers/borrowers being allowed to select their appraisers. The purpose of the appraisal in a mortgage assignment is to estimate the value of the property to see if it is adequate collateral for the mortgage. It has nothing to do with the buyer. THATS part of the problem. If the buyer needs an appraisal to feel comfortable with the purchase, thats entirely different and may be prudent in a volatile market.

  3. marty tessler says:

    Jonathan-you hit the nail on the head with the “lobbying” comment. If you did not read it-get the Dec 31st Wall St Journal and read the front pg article on Ameriquest’s vast $$ lobbying effort to influence mortgage lending in NJ & Georgia and other states which wanted to prevent flim flam lending/borrowing. Its a must-read. Happy New Year M

  4. Sam Adler says:

    Jonathan, You are so correct, the pressure is the killer.

    I just wanted to add another problem, those management companies which took over the retail business, they have appraiser’s doing a SFR/1004 for $150- and Multi/1025 for $250- Now, cheap fee means cheap quality, and they are fine with that. Maybe if they would not just look for the cheapest appraiser, the mortgage securities would not have become so cheap.

    Thanks and Happy New Year Sam

  5. Jonathan J. Miller says:

    Thanks Sam – EXACTLY!

  6. Joe Palumbo says:

    This problem comes from within: we can’t just blame the law makers or the users of appraisals. They are a part of the issue. When you see a “bad” appraisal your first thought is how can this guy/gal sleep at night? I have seen some very expensive bad appraisals done by very competent appraisers…..so price is not the issue always either. Imagine how fast the management companies would fold OR pay a reasonable fee … if the mass appraisal population just said “NO”. The real issue is that “appraisers”continue to make some bad decisions, most notably to perform unprofessionally regardless of fee…and that COMES FROM WITHIN and must be rectified from the same place….argue laws all you want…but morals are the issue at heart.

  7. Sam Martin says:

    You stated: “Lending institutions should be required to maintain formal appraisal panels that are reviewed annually for quality by underwriting personnel, not sales personnel.” As long as this function is maintained on an institution-by-institution basis, there will be possible collusion. Additionally, the quality of the private panel will vary wildly from institution-to-institution. My solution is to create a national fee panel, run by an agency of appraisers, much like the old FHA fee panel, and like the current VA panel. Every appraisal will be defined as an appraisal…no beating around the bush. Every appraisal must be performed by a licensed appraiser with the appropriate qualififcations and licensure to complete the assignment competently. Every appraisal assignment must be ordered through the panel. Every appraisal must be submitted to the panel for review. And every appraisal is then submitted to the client. Direct contact with the appraiser about that assignment would be illegal. If the system is voluntary, it will not work. If the system is left up to lenders or states, it will be more cumbersome, and quality will vary radically. A national solution is best for all involved. This is a wonderful thread, with great responses. I look forward to following this thread, to see where it leads us. I have already voiced my concerns with state regulators, the VA, and appraisal forums elsewhere.

    Sam Martin, MA, BSc, IFA

    PS…I agree with the “other” Sam above. This is what happens when the fee panel function is taken over by private groups. The pressure is then placed on those AMCs, who then place the pressure smack dab back on US. The problem is not solved. Another player is added, who then sucks up some of our fee, while placing the same pressure on us. Look at eAppraise It.

  8. Chris Vlad says:

    APPRAISAL BUSINESS UNWRAPPED

    A brief history – from the inside

    The appraisal business used to be an honest profession! Appraisers and lenders had a direct and simple bond. The appraiser told the lender the truth, the whole truth and nothing but the truth – the lender had the authority to act – and they did (lend) or did not. Well, of course, that was too tempting a set up for politicians to let be, so they decided that, this being a money making business, they obviously deserve a piece of the action. Appraisal licensing was introduced nationwide and, of course in Florida, circa 1991. There were “Certified Appraisers” who were deemed qualified to appraise property on their own. There were also “registered” and “licensed” appraisers who were not deemed qualified, so they had to work under the supervision of a certified appraiser. It all worked fairly well for a while, as lenders, brokers and the general public got used to the idea and the system. Coincidently, as soon as property prices begun to rise, the appraisal board (the body in charge of appraisers in the state licensing division) got flooded with complaints from realtors and homeowners (many spurred on by realtors) that appraisers are not making the values because they are not qualified. Of course that is not exactly how these complaints were phrased. They alleged that “inexperienced”, apprentice appraisers, do not understand the market. The state saw an opportunity to pressure more appraisers into becoming certified (read – buy the more expensive license). This was a great opportunity to appease the public and to make money; so the regulatory authority removed both the “registered” and the “licensed” designations and replaced them with a more demeaning term “registered trainee” appraiser. It did not matter how many years of experience these people had. Weather they were in this business for one month or for one decade, they were all trainees. Two people in my office fit that designation even though they had 10 and 13 years experience respectively. Additional pressure was placed on lenders to consider only certified appraisers as qualified to sign appraisal reports. But the real estate values kept rising. In fact they were rising at an unprecedented pace. Appraisers were not keeping up. They were killing deals by the thousands and that was not politically acceptable nor expedient. Realtors and homeowners were once again flooding the state with complaints about the lack of qualification and market knowledge of the “trainee” appraisers who were killing their deals. In an unprecedented move, which has not been seen in any similar industry, the regulators decided that “trainee’ appraisers were not only unqualified, but they were just not supervised well enough. From this point on, there will be no more than four (4) “trainees” allowed under the supervision of one certified appraiser. A mortgage broker can have an unlimited number of junior brokers under his/her supervision (it takes 3 days to get a mortgage broker license in Florida). A real estate broker can have an unlimited number of sales associates under his/her license and supervision. In fact, the most successful real estate business models of late are no more than license farms, where agents place their license, get 100% of the commission an pay a transaction fee. This is deemed adequate supervision, in the eye of the state, of people that are empowered to write legal documents (contracts, leases). However, even though appraisers ultimately serve institutional lenders, not the public, and institutional lenders presumably know their best interest, appraisers, which are the most trained of all the real estate practitioners (save attorneys) are not qualified, even though certified, to hire more than 4 agents. As always, the law of “unintended” consequences has produced some interesting results: – Established companies, with years of experience and good reputations, found it hard to keep adequately staffed – “Trainee” appraisers, regardless of how many years of experience they had, were finding it harder, if not impossible to get a job Obviously, they flooded the real estate schools and got certified as soon as they could. ( there were waiting periods of months for courses needed for certification, course prices were raised considerably, etc.) And yes, the most politically desired consequence of them all came through: the state was selling certification licenses by the thousand! The final outcome – EVERY “TRAINEE” THAT WAS WORTHLESS AND UNQUALIFIED, AND THAT HAS MANAGED TO BUY A CERTIFICATION, HAS MIRACULOUSLY BECOME WORTHY, KNOWLEDGEABLE AND QUALIFIED TO BE ON HIS OWN. Time will reveal, that this was the biggest political mistake ever to affect the appraisal industry, and one of the biggest for the lending industry. Thousand of newly certified and state sanctioned appraisers flooded the market. They found it most expedient to make a living as “independent” appraisers, working alone by developing a symbiotic relationship with one or two mortgage brokers. The broker(s) gave them all the business they had, and the appraiser made sure that all the deals appraised for the number necessary to make the loan. Who do you think has more to lose? A well established company with a full staff, a reputation and a solid net worth, or a “lone gunman” working out of his truck, living in a rental apartment that managed to get a computer, a cell phone and a license? Who can be most easily bought? Many such appraisers found themselves faced with a simple choice – make the lender’s number or loose the job and not be able to pay their rent. Most people don’t start out looking to be dishonest. I trained appraisers for over 17 years and the newbies are more likely to be tight and conservative then loose and accommodative. But they learn quickly. It is a sad statement to make, but before all the licensing and the regulation, you, as appraiser served the client. You were looking out for the client’s interest and it did not matter if a realtor or a home owner got upset. You either had clients that trusted you or you did not. That is no longer the case. You can become subject to state inquires and harassment, to client abuse and lender “black listing” simply because a realtor or a homeowner did not get their deal done and decided to send complaint letters to the state and the lender. I had an attorney threaten to sue me for “restriction of trade” for not appraising his house high enough to meet the contract price. There are many qualified, honest property appraisers who would like nothing more than to be unbiased and do their job. In the scope of the real estate transaction, the appraiser makes the least amount of money and is the most easily replaced if he does not fulfill the wishes of those that hired him. Imagine a referee begin replaced in the middle of the game if one of the teams does not like a call. Imagine the same referee being told that the only way he’ll get paid is if he reverses the call he just made. There was a time when the state was making no money from licensing appraisers, and appraisers and their clients interests were aligned. Now the state make millions from licensing fees, lenders do not lend their own money and they “shop” appraisers until they get what they want. It has been a great ride for 21 years. It’s been love and pain, challenge and opportunity. This business has shaped my life and that of may around me. There is now, more than ever, a need and a noble purpose for this profession. The market forces may dictate the way the future will shape it, or more and more regulation will eventually render the entire exercise worthless. As any business and any business sector, it can adapt and survive, given the opportunity. But regulatory strongholds are its biggest threat. Keep your eyes wide open, follow the money and the path of the future will reveal itself.

  9. Chris Vlad says:

    Sorry, I entered an email which is no longer active

  10. Hans Schaetzke II says:

    Wow Chris you have certainly painted a detailed picture of a sad down-turn and I see the entire history of our profession in a different light. I can’t help but agree with your well spoken line of reasoning. Increased regulation has solved nothing and I have had personal experience with your statement, “EVERY “TRAINEE” THAT WAS WORTHLESS AND UNQUALIFIED, AND THAT HAS MANAGED TO BUY A CERTIFICATION, HAS MIRACULOUSLY BECOME WORTHY, and KNOWLEDGEABLE AND QUALIFIED TO BE ON HIS OWN.” I have trainees who are now certified and remain unable to perform anything but the simplest appraisal and then only because they have an estimate of value handed to them… loan facilitators I like to call them. But was it really better before the licensing? What about the famed “Savings and Loan Debacle”?

    I suddenly agree that perhaps our state regulators (who are appraisers in Illinois) should look back to the prior arrangement while looking forward with state involvement. I mean if the Appraisal Institute gets rich because no one respects an appraiser who is not a member than at least its appraiser’s getting rich and not some third party that doesn’t even “know how to care” if the appraisal business serves the public interest.

    I know one thing for sure, get a room full of appraiser’s talking and before long you have a room full of saints who would never consider working without integrity. Of course the reality is sometimes different. But the exercise of sitting amid that room full of “saints” remains with us when we leave the room and acts to strengthen our conscience when we are on our own and in pressure settings. I have been appraising for 15 years but it has been the 15 after the onset of licensing. I have never paid dues to the Institute but I am part of a political action group of appraisers that makes a real difference in Illinois (ICAP). I know at are meetings we often feel we are preaching to the choir. Is it really so that if we went back to the old system when you had to be affiliated with an appraisal association like the Appraisal Institute we would all be proverbial choir boys? It may sound like a sarcastic question but it is not. Why haven’t our high ranking appraisal regulators recognized the need to revert back to self regulation rather than pushing further and further into 3rd party regulation? Maybe that’s a question I should ask the regulators… I think I will.