Housing Appraisals: Still Blowing Bubbles?
Third-party appraisal managers are supposed to eliminate pressure from Lenders to inflate housing values. But unscrupulous subprime players are Crowding into the market
by Chad Terhune
Home appraisers played one of the less well-known roles in pumping up home values and contributing to the current financial crisis. Retained by Lenders or brokers, they frequently colluded—explicitly or tacitly—in Overestimating the worth of houses to justify large mortgages and the Lucrative fees each member of the real estate food chain received at Closing.
Faced with investigations and lawsuits, the home-finance industry has Agreed to a government-approved code of conduct for appraisals that takes Effect on May 1. The new rules promote the use of middlemen between the Nation's 60,000 freelance appraisers and the lenders and brokers. The Middlemen, known as appraisal management companies, or AMCs, are supposed to prevent lenders and brokers from pressuring appraisers to exaggerate assessments. But among those joining the swelling ranks of this formerly niche business are some of the same subprime players that helped inflate the real estate bubble in the first place.
The new rules grew out of an investigation by New York Attorney General Andrew M. Cuomo. His probe found that one of the biggest companies in the appraisal business, First American (FAF) in Santa Ana, Calif., allowed the huge savings and loan Washington Mutual to exert pressure for higher valuations. Cuomo sued First American's eAppraiseIT unit in November 2007 for fraudulent and deceptive practices. The suit, which is pending in New York state court, spurred the drafting of the Home Valuation Code of Conduct. Mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE), now controlled by the federal government, helped negotiate the code with others in the industry and have said they won't buy loans after May 1 that don't adhere to it. Fannie and Freddie have wide influence because they purchase a large share of all U.S. mortgages, providing fresh cash to lenders.Right here in Florida, an Appraisal Management Company is owned and operated by an individual that surrendered his Certified Residential Appraiser credential for permanent revocation.
Larry Holzer surrendered his Florida appraisal license (page 3) in April 2007 after regulators there found he had made numerous misstatements in an appraisal report for a $250,000 home. In a letter to Florida regulators, Holzer agreed there were some "data discrepancies in the body of the report." He said he was distracted at the time by personal issues.
Now Holzer is back in business, running an AMC in Clearwater called Global Appraisal Solutions. The company promises same-day inspections and delivery of a report within 24 hours. In an e-mail, he defended his credentials: "Appraisers and former appraisers are among the more qualified people in appraisal management," he wrote. "When or if such time should come where appraisal management companies are regulated, I can assure you that Global Appraisal Solutions shall be compliant."
Joni Herndon, chairwoman of the Florida Real Estate Appraisal Board, which handled the Holzer investigation, says a revolving door is allowing dubious characters into the AMC market. Speaking generally, she says: "It is not serving the public to revoke their license for dishonest conduct and then allow them to have an appraisal management company. We need to close that loophole.".
Hopefully, bills will be introduced in the 2009 Florida Legislative session to require the regulation of Appraisal Management Companies. Lenders, borrowers and consumers need protection from folks with a record of illegal behavior