Unscrupulous lenders and mortgage brokers have “a totally free shot at the appraisal” because they are able to coerce appraisers in an “unregulated wilderness” where rules don’t exist or aren’t consistently enforced, a spokesman for appraisers told lawmakers this week.

Alan E. Hummel, chairman of the Appraisal Institute’s government relations committee, told members of a Senate subcommittee that such coercion, whether it’s subtle or blatant, can have devastating impacts.

“People have lost their homes to foreclosure; entire segments of the mortgage market have collapsed; and mortgage fraud has surged,” Hummel told the Subcommittee on Housing, Transportation and Community Development. “Neighborhoods throughout the country have been devastated by mortgage lending abuse.”

Sometimes, appraisers are told to doctor their reports or lose out on future assignments, Hummel said. Or they will be told to overlook material issues or conditions that would prevent an appraisal from hitting a predetermined number, “or else.”

The threats are difficult to document because they usually take place over the phone or through an informal communication. But Hummel told lawmakers that surveys of appraisers show the problem is real, and that he has “personally experienced such threats.”

“On several occasions clients have told me that failing to comply with their wishes will result in my firm not being paid or never receiving work from that institution in the future,” Hummel said in prepared testimony to the committee. “In these cases, for not bowing to these pressures, I lost clients and was not paid for my services. I am one of many appraisers with this experience.”

An independent survey conducted earlier this year found that 90 percent of appraisers have felt pressured to raise property values from mortgage brokers, lenders, real estate agents and others — nearly twice as many as in a similar survey three years ago, Hummel said. The survey, conducted by October Research Corp., found such pressure came most often from mortgage brokers (71 percent), followed by real estate agents and brokers (56 percent), consumers (35 percent), lenders (33 percent), and appraisal management companies (25 percent).

Hummel shared an e-mail message he recently received from a client who was looking for a way to conceal a problem with a property noted in an appraisal. The appraisal noted “an area of the front porch flooring, which decayed. According to the owner, the basement gets some dampness during storms through the newer area of the foundation.”

The client, a mortgage broker, asked Hummel, “Do you guys know Appraisals 101? This statement should never be on the report. Now we face a big problem with the lender here and this makes the customer very unhappy as well.”

The broker asked if it was “essential to notice” the decayed area. “What if it was covered with a rug? I need to know what to do here. How can you help us get this in line? What is the exact problem? What is cost to cure?”

Hummel testified dryly that he could assure members of the Committee, “The cost to ‘cure’ the decaying front porch flooring is a little more than the cost of an area rug to cover up the damage.”

While federally regulated lenders are required to follow some sensible precautions to ensure the independence of their appraisal process, the rules aren’t always enforced, Hummel said. And mortgage brokers or non-bank lenders who are regulated by the states face little or no oversight of their appraisal processes.

At the federal level, lawmakers have attempted to erect internal firewalls in lending institutions to maintain the integrity of the appraisal process, Hummel said. The Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA, for example, prohibits the loan officer who signs off on a loan from ordering and reviewing the appraisal. That task has to be performed by somebody else at the bank or savings and loan.

Before FIRREA — which was partly a response to the shoddy appraisals that helped drive the savings-and-loan crisis — only a few states regulated appraisals and the appraisers who performed them, Hummel said.

Title XI of FIRREA created an appraisal oversight structure that included private, state and federal entities. But a 2006 federal audit of 23 states found 14 were not resolving complaints expeditiously or adequately documenting enforcement files.

Shortcomings in FIRREA “are contributing to appraiser involvement in mortgage fraud,” Hummel said. “Federal and state appraiser regulators lack adequate tools and resources to properly oversee appraiser licensing and enforcement. Consequently, complaints against appraisers often languish unresolved before state appraisal boards, with virtually no ramifications.”

Hummel said appraisers want lawmakers to update FIRREA to provide resources to state appraisal boards to support enforcement activities, increase federal regulatory authority over state appraisal boards, mandate public disclosure of the results of all field reviews of state appraiser regulatory agencies, and encourage the use of professionally designated appraisers.

In addition to updating FIRREA, steps that could be taken at the federal level include placing an anti-coercion requirement in a definition of “abusive lending practices” now being drafted by the Federal Reserve, and instituting federal licensing and registration requirements for appraisers.

Lender accountability measures for those who order and review appraisals could also curb such practices. Hummel cited a Federal Housing Administration policy that makes lenders who have knowledge — or should have had knowledge — of a deficient appraisal liable to civil monetary penalties. Hummel said the policy, outlined in a January 2005 letter, could serve as a model for a standard that would apply to all federally regulated lenders.

Uniform guidelines for appraisal independence are also needed for lenders regulated at the state level, Hummel said. The process for putting such guidelines in place might resemble the ongoing campaign by the Conference of State Bank Supervisors to persuade states to adopt guidelines for nontraditional mortgage loans put forward last fall by federal regulators, he said (see Inman News story). So far, more than 30 states have followed suit, according to CSBS.

Until states adopt uniform guidelines for appraisal independence, lenders regulated at the state level face a patchwork of rules — or none at all — for dealing with appraisers.

Ohio, Colorado and Iowa have all recently passed laws prohibiting brokers and lenders from pressuring appraisers, joining Arkansas, Kansas, North Carolina, Utah and West Virginia, which have similar laws on the books, Hummel said.

Ohio’s new predatory lending law has already produced 10 complaints against lenders and an appraisal management company alleging attempted coercion of appraisers (see Inman News story).

Other states currently considering such legislation include Michigan, California, and Florida, Hummel said.

“We live in a world split between two different standards for appraisal independence and appraiser coercion,” Hummel said. “One segment is relatively robust, monitored by federal bank regulators; the other devoid of such protection, with alarming results.”

Hummel cited as an example last year’s $325 million Ameriquest Mortgage Co. settlement, which resolved allegations by more than 40 states that the company deceived borrowers, falsified loan documents and pressured appraisers to overstate home values.

Ameriquest denied the allegations, but agreed to overhaul its appraisal practices by removing branch offices and sales personnel from the appraiser selection process and instituting an automated system to select appraisers from panels created in each state, Hummel said.

It’s not just improper attempts to influence the appraisal process that can lead to trouble, Hummel said. When lenders attempt to cut costs by hiring inexperienced appraisers — or not using an appraiser at all — they leave themselves more vulnerable to fraud schemes.

“Appraiser competency should not bow to cost and turn-around time,” Hummel said. “The federal bank regulators have attempted to emphasize this in recent years, but we face an uphill battle if participants continue to view the appraisal process as they do.”

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