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April 22, 2009

Report Explores Appraisers' Role in Housing Bubble

The Center for Public Integrity has released a report that has found that lenders often pressured appraisers to inflate home values. The report’s findings, which were released last week, are the result of an analysis exploring the role appraisers may have played in inflating the housing bubble.

Pressure on appraisers to inflate values, especially in thriving markets, is nothing new. Bill Garber, director of government and external relations for the Appraisal Institute, who was quoted in the report, notes how appraiser pressure has been an ongoing problem that is just now receiving the attention it deserves, despite his organization’s repeated testimony in front of Congressional committees dating back to 2001.

“In times when lenders were looking to make the largest loans possible and sell to investors, competent and ethical appraisers were shunned by many in the mortgage industry,” explained Garber. “Unfortunately, similar practices are being perpetuated today with lenders and their agents disregarding appraiser qualifications from the appraiser hiring process altogether. What we need to start doing is to build incentives to use competent and ethical appraisers.”

According to the results of a 2007 study conducted by October Research, a real estate news provider,   more than 90 percent of 1,200 appraisers polled reported feeling pressure to change property values, usually from lenders, mortgage brokers or real estate agents. That number was staggering and raised red flags at both the federal and state levels.

Since 2007, Congressional representatives have introduced several pieces of legislation designed to promote appraiser independence and place stiff penalties on parties who interfere in the appraisal process. While these actions have been met with banking industry resistance and mixed success, one new development has had a profound effect on the mortgage lending industry.

In 2007, following an investigation into the abuses in the appraisal process, New York Attorney General Andrew Cuomo filed a lawsuit against First American Corp. and its subsidiary First American eAppraiseIT, charging that eAppraiseIT allowed loan production staff at Washington Mutual to pressure appraisers to inflate home values. Though the lawsuit is still pending, the aftershocks of Cuomo’s actions are being felt today.

As a result of Cuomo’s lawsuit, and the launch of an investigation into whether Fannie Mae and Freddie Mac knowingly bought loans that included inflated appraisals, the mortgage lending industry agreed to change. Thus was born the Home Valuation Code of Conduct, an industry standard which affects all loans eligible for purchase by Fannie and Freddie and bans lenders from pressuring appraisers or threatening to withhold business. Going into effect on May 1, 2009, the HVCC is intended to safeguard appraisers from lender pressure.

However, as the Center for Public Integrity’s report notes, the incentive to pressure appraisers still exists, especially for supposedly independent appraisal management companies. This is a concern to the appraisal industry and lenders, many of whom have voiced strong concerns over the shortcomings of the HVCC.

“Unfortunately, the HVCC promotes the use of appraisal management companies, which were ironically what New York Attorney General Cuomo went after in the first place,” Garber noted. “While the HVCC has its merits, it also contains a good deal of language that is simply lip service to cleaning up the industry. Unless appraisal management companies become regulated, they are just as capable of pressuring appraisers as anyone else.”

To read the report issued by the Center for Public Integrity, visit

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