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Tuesday, Jan. 8, 2008 | With prosecutors nationwide illuminating real estate fraud schemes undertaken during this decade’s heated housing market, at least one of the state’s legions of real estate professionals face new training requirements. California’s Office of Real Estate Appraisers raised the bar last week for would-be appraisers wishing to join the 19,500 appraisers already licensed and working around the state.

The tightened requirements are expected to increase professionalism and to help weed out unscrupulous potential licensees looking for an easy job. The role is crucial; lenders rely on appraisers for honest, researched assessments of what a home is worth — and how much mortgage it merits.

But some appraisers this decade were pulled into shady schemes in which agents and loan officers and buyers colluded to rip off banks. Buyers would, based on artificially inflated appraisals, convince the banks to lend them more than the house was actually worth, kick cash back to the parties involved, and then foreclose, leaving the lenders holding a house worth less than the mortgage.

Appraisers’ work must be especially meticulous in a down real estate market, when mistakes aren’t easily covered by the rapid price appreciation San Diego experienced for many years this decade. Prices for detached resale homes have dropped 13 percent from the peak in November 2005, according to the latest data from Standard & Poor’s/Case-Shiller home price index for October 2007.

Market conditions have cooled, illuminating some of the fraud schemes that permeated the region while real estate was hot. And appraisers are, along with other professional posts associated with real estate transactions, under scrutiny for their role in such schemes.

Now, with more stringent education requirements — notably, a required two-year associate’s degree from an accredited institution to become a certified residential real estate appraiser, tougher examinations and increased course hours — they sense the change will help. Previously, potential appraisers had been required to attend private appraisal training but no additional college training.

Though the new education requirements don’t explicitly guard against appraisal fraud, those in the profession say they hope the education obstacles will help to weed out some uncommitted, unscrupulous appraisers at the outset.

“While appraisers aren’t the ones to completely blame for [the prevalence of fraud], certainly they’re a part of the process and the process needs to be looked at,” said Don Kelly, director of external affairs for the Appraisal Institute in Washington, D.C., the membership association belonged to by many professional appraisers.

Some longtime professional appraisers, real estate and mortgage agents and brokers have complained loudly that the barrier to entry into their professions is too low. They lament the young or novice workers who entered the business to get rich quick, did sloppy work and since have left the old-timers to try to dust off their reputation.

“The problem before was that any idiot could get a license,” said Todd Lackner, a residential real estate appraiser in Mission Valley. “[Now] it’s going to really weed out the bottom end people.”

Like many real estate-related professions, the ranks of appraisers swelled this decade, exceeding 20,000 statewide for the first time in mid-2007, according to the California Office of Real Estate Appraisers. Those numbers have dropped a little, but hover around 19,500 now, said Greg Harding, the office’s chief of licensing and enforcement. While Harding expects a significant drop in applications while market conditions remain tough around the state, the deadline for getting in under the old rules inspired an avalanche of mail to the Sacramento office.

“There’s been almost a panic,” Harding said. “The last three months of the year, we had a record influx of mail, just an incredible amount of initial licenses and people trying to upgrade their current license.”

Sara Schwarzentraub is a local appraiser who teaches some of the required classes for new licensees. She expects that overall, the changes in the required knowledge and coursework will prove a good change for the profession. But while many current appraisers laud the changes in education, they still see some holes in the process. The state should incentivize the mentoring of new appraisers by established professionals, she said.

“The training area — that, still, nothing has been done about,” she said. “Training people falls to fee appraisers, and when they’re training somebody, they’re not making any money.”

And, without a close relationship with a mentor, the temptation rises to appraise a home at a higher value than it’s worth, or to otherwise engage in real estate fraud schemes, Schwarzentraub said.

“Hopefully all of these requirements will lead to a higher understanding [among] appraisers,” Harding, of the state appraisers office, said. “Also, to where ethics will be stressed, that when appraisers are pushed by unscrupulous real estate agents, they won’t be complicit in a fraudulent transaction.”

The increased scrutiny hasn’t just come from within the profession. When prices were rising, lenders often didn’t lose money even on homes abandoned after the cash-back schemes. But now, the lenders that are still making loans, and their backers, are saddled with so many foreclosed homes and have taken so many losses that they are exponentially more careful with the money they lend on individual properties than they were in the heated market.

That double- and triple-checking from lenders on the prices named by appraisers could have a greater weeding-out effect on the ranks of appraisers. Where appraisers could once include in their report to the lender a list of just three comparable homes that had sold in the last six months, they now are facing tougher research. Lackner said some major lenders are now requiring a list of two sales within 60 days, plus the prices of two comparable homes currently on the market.

“The biggest measured effect is the market itself,” Lackner said. “It’s not double the work, but it’s a lot more work.”

Lackner, who collects files on transactions he says typify cash-back-at-closing fraud schemes, said he feels a bit vindicated by the market conditions, though his office sees about a third as many requests for appraisals as they did a couple of years ago.

“People always made fun of me, they said I was conservative,” he said. “They called me ‘Lowball Lackner.’ Call me what you want but I’m accurate.”

Schwarzentraub said it’s unlikely the industry pressure will be eternal.

“The only reason [the lenders] became concerned is because their investors became concerned,” she said. “The quality of the appraisal is only an issue when the markets are going down, and they are right now. … But when people’s mistakes are covered by appreciation, they’ll turn a blind eye to it again. And it won’t matter because the investors will be satisfied.”

Pete Ogilvie, president of the California Association of Mortgage Brokers and broker at First Residential Mortgage in Santa Cruz, said his organization supports increased requirements for professionalism across the board in real estate professions.

“The only people we can’t make more professional are borrowers and investors,” he said.

He said any standards that raise the bar and demand more commitment from a real estate job-seeker are welcome.

“Commitment is the key,” he said. “Are you going to have a career or are you going to have a job tomorrow that you can get rich quick on?”

Please contact Kelly Bennett directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.

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