Seeking honest home values

Starting today, the educational requirements for California home appraisers will be tougher, but a veteran property evaluator who teaches how to spot fraud says the rules won’t alter how many appraisers do their jobs.

The new rules require 67% more hours of training before appraisers are certified at various levels, and define more precisely the curriculum to be used. The regulations are taking effect about two months after California enacted a law making it illegal to pressure an appraiser to inflate a valuation.

But master appraiser Steven R. Smith of Redlands says the changes won’t fix what he described as the main problem: high-volume appraisal companies’ relying too heavily on computers and trainees rather than legwork and interviews.

At a recent mortgage-fraud seminar in Orange County attended by scores of appraisers seeking to meet the new requirements, Smith said it was common for appraisers to seek comparative prices, or “comps,” that match clients’ price objectives rather than perform the objective analysis that they are required to do.

If sales in an immediate area don’t support the desired price, appraisers look elsewhere, perhaps to a higher-end neighborhood not much farther away, he said.

“We have an army of appraisers that don’t know they’re wrong,” Smith said in an interview. “If you are trained to search for comps based on price, that’s what you will do.”

That won’t change much until appraisers are allowed to take the time necessary for a proper evaluation -- typically a day or two -- rather than rush through two or three appraisals a day as companies often require them to do, he said.

During the housing boom, inflated appraisals could remain undiscovered as rising home prices quickly caught up with puffed-up valuations. But flawed appraisals encouraged recklessness and in some cases fraud, experts say, exacerbating foreclosures and lenders’ losses once prices began falling.

The issue isn’t new. Inflated appraisals were blamed for enabling savings and loans in the 1980s to make rash investments that ultimately cost taxpayers hundreds of billion of dollars.

In an echo of that fiasco, bad appraisals have contributed to the current mortgage crisis by propping up loans made with little or no down payments and speculative home purchases, Smith said.

“We literally have millions and millions of inflated appraisals,” he said.

Some may be more inflated than others. In a federal criminal case, two Orange County appraisers, Lila Rizk and L. Scott Robinson, are accused of fraudulently inflating appraisals on more than 20 homes in Beverly Hills and elsewhere on the Westside.

According to the indictment in Los Angeles federal court, Rizk and Robinson gave appraisals that were millions of dollars higher than the homes’ list prices, used far-off and dissimilar properties as comps while ignoring similar properties near the homes, and used their own previously inflated appraisals as comps.

Rizk and Robinson allegedly profited by collecting hundreds of thousands of dollars in pumped-up appraisal fees, while other defendants allegedly pocketed proceeds from loans made for millions of dollars more than the true sales price of the homes.

Rizk and Robinson have pleaded not guilty. Rizk’s attorney, Jan L. Handzlik, said Monday that the appraisers depended on phony comparable sales documents prepared by the ringleaders of the fraud and were fooled “just like the banks.”

Robinson’s lawyer, Errol H. Stambler, said the lenders “were as much at fault as anyone in this matter.”

In a case with national reach, New York Atty. Gen Andrew Cuomo filed a fraud lawsuit Nov. 1 against First American Corp. of Santa Ana, accusing the real estate services firm of inflating appraisals across the country under pressure from Seattle lender Washington Mutual Inc.

Washington Mutual has said it is cooperating with investigations by federal regulators in the case and expects to be vindicated. First American said the suit was without merit and said Cuomo had “mischaracterized” a handful of e-mails.

But Cuomo, a former U.S. secretary of Housing and Urban Development, said the case was “symbolic of an industrywide problem.”

Like credit scores and other data, appraisals limit how much lenders will lend. Low valuations can torpedo deals. In such cases, lenders lose fees and loan officers, mortgage brokers and real estate agents lose commissions.

Appraisers who deliver bad news can lose assignments.

“You can bring back an appraisal that’s lower than the lender wanted,” said Keefe, Bruyette & Woods bank analyst Fred Cannon. “But it will probably be the last time the bank calls you up offering work.”

Current regulation of appraisers resulted from the mass failure of S&Ls; in the 1980s. A congressional panel concluded that flawed and fraudulent appraisals were major contributors to the losses.

In the wake of the S&L; crisis, a 1989 federal law required states to license or certify appraisers working for banks and thrifts insured by the Federal Deposit Insurance Corp. Appraisers could lose their licenses for skewing estimates to give clients the property values they sought. Lenders were supposed to erect “firewalls” between employees who order and evaluate appraisals and those who sign off on loan decisions.

In California, the Office of Real Estate Appraisers was created to license and oversee appraisers under the federal law. Each year, the office has revoked 12 to 15 licenses of fraudulent or grossly negligent appraisers, said Greg Harding, the office’s chief of licensing and enforcement.

An additional 200 to 220 cases a year have been settled, mainly by imposing fines, rehabilitative education or license suspensions on negligent or incompetent appraisers, Harding said.

Last year, acting to fill a gap in federal law, California legislators passed a law making it a misdemeanor to improperly influence a real estate appraiser. Under the new state law, which took effect when it was signed Oct. 5 by Gov. Arnold Schwarzenegger, California appraisers who believe that they have been improperly pressured can file reports with state officials or federal regulators against licensed real estate brokers or agents, mortgage brokers or lenders. Several other states have passed similar laws.

Smith said he was skeptical that the new California law would make a difference. Calling state real estate regulators “impotent,” he said that filing a complaint with them has been “like throwing it into a deep hole.”

The new state appraiser education rules have been in the works for seven years, growing out of a February 2001 meeting between state regulators and a federal panel that sets standards for how states certify appraisers. At that meeting, authorities acknowledged that appraisal problems remained and decided that the states should beef up their rules, Harding said.

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