Washington is finally moving to better regulate the real estate appraisal industry, with regulators yesterday proposing new rules to strengthen appraiser independence.
It's about time.
Seven years ago, when the housing bubble was still inflating, I wrote a report for Demos on the growing epidemic of appraisal fraud. Residential real estate appraisers, I reported, were being routinely pressured by mortgage brokers to inflate their estimates of home values -- to "hit the number" needed to make a loan happen.
Appraisal fraud helped to fuel the go-go housing market and is one reason why so many homeowners ended up so deeply underwater. With appraisers signing off on bogus numbers, people could borrow more than their homes were worth, especially through refis.
The appraisers themselves weren't the problem; most wanted to do their jobs honestly. Rather, appraisers found that if they didn't come back with inflated valuations, or otherwise play ball, they could be blacklisted by brokers or not paid for past work.
This was yet another area where lax regulation made the mortgage crisis possible. The appraisal industry was overseen by a patchwork of government agencies that varied widely, often from state to state, in their capacity to enforce standards. And it was also difficult to sanction the mortgage brokers who were bullying appraisers.
Following the housing collapse, then-New York State Attorney General Andrew Cuomo orchestrated an industry agreement to change behavior called the Home Valuation Code of Conduct, which produced big problems of its own -- particularly the undervaluation of homes, which helped scotch home sale deals and dampened the housing market.
Now things are set to change, and get better, thanks to the proposed new rules, which are part of Dodd-Frank. (A law that keeps impressing us with how many problems it is designed to solve.) The new rules will get rid of the HVCC and apply mainly to higher risk mortgages that have interest rates above a certain threshold. The rules aim to ensure more appraiser independence and, among other things, require a second appraisal on properties -- in effect, creating a check in the system.
It's unclear to me why the new rules won't apply to all mortgages, but clearly this is an important step toward reforming a housing and mortgage market that brought down the U.S. economy.
As reported by Bankrate.com, "the Consumer Financial Protection Bureau will be charged with establishing federal rules to ensure appraisers' independence. These rules will preempt or supplement existing federal and state appraisal laws and regulations. . . "
This is how things should be: A single powerful regulator in Washington playing watchdog instead of a bunch of state agencies that too often are starved for resources, especially in conservative states where regulation is a dirty word.
As I said, it's about time.