Appraisers played role in loan crisis

As soaring home prices set the stage for America's great housing meltdown, a critical step in making sure those home sales were a fair deal - the real estate appraisal - was undermined from within.

After the nation's last major banking disaster, Congress set up a system to catch rogue appraisers. Their game is to inflate the value of homes at the direction of equally unscrupulous real estate agents and mortgage brokers, whose commissions are determined by the size of the deals.

But a six-month Associated Press investigation found that the system is crippled by the bumbling of regulators, as well as their inability to effectively punish those caught committing fraud.

Critics say there's ample evidence that appraisers are being pressured into inflating home values - sometimes to support loans that are more than buyers can afford - but that regulators have made a conscious choice not to act.

"The system is completely broken," said Marc Weinberg, the former acting director at the federal agency charged with monitoring the appraisal industry. "It's amazing that the system ever worked at all."

The AP conducted dozens of interviews and reviewed thousands of state and federal documents. It found:

-- Since 2005, at the height of the housing boom, more than two dozen states and U.S. territories have violated federal rules by failing to investigate and resolve complaints about appraisers within a year. As a result, hundreds of appraisers accused of wrongdoing remained in business.

-- The only tool federal regulators have to force states into compliance would essentially halt all mortgage lending, so has never been used.

-- State and federal agencies are inadequately staffed to handle the hundreds of complaints made each year.

"The appraisal reforms of the late 1980s were good reforms," said Susan Wachter, a real estate professor at the University of Pennsylvania's Wharton School of Business. "But they were not sufficient to prevent what we have seen ... because regulation without teeth is not regulation."

This is the way the system is supposed to work:

Typically, an appraiser receives an order from a real estate agent, lender or mortgage broker to inspect a property. Based on a physical inspection of the home and comparable sales in the area, they develop an estimated value that is used by banks to set the home's value as collateral for the mortgage.

Appraisers are supposed to come up with a value free of any outside pressure. But more than three dozen appraisers interviewed by the AP said they often felt pressure to "hit a number."

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