Fighting Appraisal Fraud

Tuesday, January 03, 2006 | As the San Diego real estate market cools off and home prices start to fall, local real estate appraisers say they are coming under intensifying pressure from mortgage brokers to provide inflated property valuations. It’s an environment that has sparked an influx of proposed legislation both nationally and statewide.

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Local appraisers said such pressure has reached intolerable levels, and leaves the industry wide-open to appraisal fraud. The appraisers blame the brokers. Brokers blame the appraisers.

Both sides of the equation have their own theory of how the problem should be solved, and those proposals are playing out in both the California Legislature and the U.S. Congress.

John Marcell, president of the California Association of Mortgage Brokers, said the vast majority of mortgage brokers do not put pressure on appraisers. However, he acknowledged that it is practically impossible to find out when they do because appraisers usually do not report such wrongdoing.

“There’s no way we can police this unless we know one of our members is doing something that’s against our code of ethics,” Marcell said.

But appraisers and representatives of the appraisal industry said is not their job to police wayward mortgage brokers. They said the role of brokers is inadequately regulated.

“I think if you ask anybody in the appraiser regulatory business, they would likely say that there needs to be some strong regulation of mortgage brokers,” said Anthony Majewski, acting director of the California Office of Real Estate Appraisers.

That’s already in the works, according to Marcell.

A bill is slated to come before the state Senate for a hearing this month, Marcell said, that would require any person who initiates a mortgage to have a certified broking license. Marcell would also like to see a requirement in the bill, known as California Senate Bill 790, for mortgage brokers to belong to a trade organization.

“We feel it’s mandatory that anybody that’s involved in this type of business belongs to an association,” Marcell said. “Like an attorney belongs to the American Bar Association or a doctor belongs to the American Medical Association.”

“Oversight is the name of the game,” he added.

Local appraisers said they welcome any move that makes brokers more accountable than they are now.

“It’s a good start,” said Sarah Shwarzentraub, president of Inter-State Appraisal Service in La Mesa. “Hopefully, at least people who come into the business will be trained to know what is inappropriate in terms of their dealings with appraisers. I would hope that would be part of their ethical training.”

Appraiser trade groups have also taken their own steps to help insulate their ranks from undue influence from lenders.

The Appraisal Institute has given its blessing to a federal bill, HR 1295, the Responsible Lending Act. The act is focused on ensuring the independence of appraisers by prohibiting any parties to a loan transaction from improperly influencing an appraiser.

Don Kelly, vice president of public affairs at the Appraisal Institute, a trade group for real estate appraisers, said he supports HR 1295, which is currently working its way through the House of Representatives.

Kelly said the bill makes it clear that putting pressure on an appraiser is illegal, but stressed that his organization is still pushing for the inclusion of strong civil and monetary penalties for those who apply such pressure. Without such penalties, the bill will not have teeth, Kelly said.

Increased regulation of mortgage brokers is just one part of the solution, however. For every mortgage broker engaged in fraud, there is an appraiser who is willing to play the game and inflate property values.

Currently, regulation of appraisers is left up to individual states. In California, regulation of licensed appraisers is the job of the California Office of Real Estate Appraisers. That office is tasked with keeping tabs on, currently, some 19,000 appraisers. Majewski, the office’s acting director, argued that his team of 26 has provided effective oversight of the state’s appraisers.

But critics of the current system of regulation said many states have fallen behind in their duties.

“By and large they have not done a very good job of enforcing the ethical rules and the standards that appraisers are bound to through their code of conduct and professional standards,” Kelly said.

The current regulation of appraisers is a good system in theory, Kelly said, but it will take legislation to ensure that lending practices get back on an ethical track.

“The appraiser is the eyes and ears of the lender and ought to be the lender’s best friend.” Kelly said.

With the huge increase in the volume of sales and lending that has accompanied San Diego’s booming housing market, that friendship has been sullied, Kelly cautioned. He added that it will take reforms of many aspects of the lending market to ensure a harmonious future for the relationship between appraisers and lenders.

Please contact Will Carless directly at