The three largest professional appraisal organizations in the United States gathered this week in Washington, D.C., to deliver a cautionary message on the deficiencies in the current real estate appraiser licensing system.
The Appraisal Institute used its invitation to testify in front of a subcommittee of the House Financial Services Committee to voice concerns about the state of appraiser regulation. Appraisal Institute President Gary P. Taylor testified on behalf of the Appraisal Institute, the American Society of Appraisers, and the American Society of Farm Manager and Rural Appraisers, at a hearing on “Broken Dreams in the Poconos: The Response of the Secondary Markets and Implications for Federal Legislation.”
“The situation in the Poconos is sad and in many ways disgusting,” Taylor said. “In the past decade, lenders have brought foreclosure proceedings against 5,700 homes in Monroe County, Pa., which is more than one in five of all mortgaged homes in the county, while banks have bought back more than $20 million in bad mortgages from secondary-market participants Fannie Mae and Freddie Mac.” State and federal authorities are currently investigating the nature of real estate transactions in the area over the past decade.
The three appraisal organizations have concluded that the mortgage fraud in the Poconos is evidence of a national problem involving the entire appraisal regulatory structure and the real estate finance markets, and is not at all unique to the area. “After reviewing the activities in the Poconos and having witnessed other mortgage fraud schemes throughout the country, we are here to alert Congress that the licensing system it created for appraisers is broken, is not up to the requirements of the changing market demands in the 21st century, and needs to be fixed if we are going to avoid such situations in the future,” Taylor said.
Taylor testified that the current laws governing appraisals are ill equipped to deal with these situations. It is increasingly common for appraisers to be pressured by mortgage brokers, a practice that has not been outlawed. Additionally, federal banking regulators have not enforced current appraisal independence regulations, which require appraisals to be ordered and reviewed by a person independent from those making loan decisions. “As a result, we estimate that perhaps thousands of financial institutions are currently not in compliance with current appraisal requirements,” Taylor said.
In his testimony, Taylor identified the problems with the existing appraisal structure as: lack of accountability; ineffective and counter-productive state enforcement programs; minimum qualifications and discouragement of professional development, and inadequate appraiser independence safeguards. He suggested 15 measures to correct weaknesses in the current appraisal licensing system, with the emphasis on improving the state appraisal board complaint processes, inserting accountability measures over the Appraisal Subcommittee, and promoting consumer awareness and professionalism.
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