Pressure on appraisers being probed

Nation's Housing

September 14, 1997|By Kenneth R. Harney

THE FEDERAL government's largest homeownership program -- FHA mortgage insurance -- is under attack for allegedly allowing lenders and realty agents to pressure appraisers to illegally inflate property valuations, ignore serious defects and building code violations and discriminate against racial minorities in the real estate appraisal profession.

The allegations already have triggered an investigation by the General Accounting Office, and are expected to be the subject of congressional hearings.

They are also under study by internal auditors at the Department of Housing and Urban Development, the agency that runs the FHA program.

Policy switch

The charges stem from a controversial policy switch made by HUD two years ago permitting lenders to hire the appraisers they prefer to value homes to be purchased by applicants for FHA loans.

Before the change, FHA appraisers were assigned to lenders on a rotating "panel" basis by the agency to ensure the independence and neutrality of the appraisal process.

Rather than depending upon a lender -- or a realty agent -- to obtain continued assignments, appraisers were responsible solely to FHA, which divided the workload equally among panel members, who were certified annually for professional competence.

Under the new "lender select" system, however, according to critics, mortgage companies increasingly are choosing poorly trained appraisers who they know won't cause problems by valuing properties below the sales contract price, or by finding problems with the property that FHA requires be fixed before the loan can go to closing.

Federal violation

Frequently, the lender uses the appraiser demanded by the real estate agent involved in the sale -- a violation of federal law.

The revised system can have costly impacts on consumers. James Hawthorne, an FHA property inspector in Elmer, N.J., says he has compiled detailed files and a 20-minute video documenting "dozens" of homes financed in the last two years by FHA in which lender-chosen appraisers "overlooked defects in the property that nobody could miss."

In virtually every case, said Hawthorne, buyers acquired FHA homes with defects that require repairs at costs of "anywhere from hundreds to thousands of dollars."

In early September, said Hawthorne in an interview, he inspected a home in southern New Jersey that had been financed 13 months earlier with an FHA loan. The house had structural damage to its foundation, roof, flooring and electrical system, plus heavy termite damage that predated the FHA appraisal.

Among the conditions Hawthorne found were seven temporary screw jacks in the basement holding up the main beam supporting the house -- a blatant violation of FHA minimum property standards -- and numerous electrical wiring violations that exposed the homeowners to a constant threat of fire.

Shoddy appraisals

The cost to repair the defects: $10,000 to $15,000, according to Hawthorne.

Nearly two dozen appraisers interviewed for this article in markets across the country suggested that Hawthorne's experience is becoming commonplace.

J. Donald Turner, an appraiser in Nashville, Tenn., said he has shown photographs documenting shoddy FHA appraisals to congressional representatives and to HUD staff. The response from local HUD officials, according to Turner, was, "Hey, we can't catch everything."

Jack Shelton, a Kansas City appraiser, said it's an open secret in the industry that "if you want [FHA appraisal assignments] you ++ can't cause trouble" for the lender who chooses you.

"I've had mortgage brokers say to me, 'this value has to come up,' " or complain that the property defects he reported like cracked plumbing were "nitpicking," Shelton said.

Edward L. Leppert, an appraiser from Columbus, Ohio, said some lenders in his market now ask appraisers to "pre-comp" a home -- tell them in advance whether they can support the value indicated on the buyer's sale contract -- before assigning them the appraisal.

"If you can't provide their number," he said, "you don't get the [job]."

Leppert, who was part of a delegation of appraisers from six states who first brought the FHA issue to the attention of Rep. Deborah Pryce, an Ohio Republican, said the current situation is "an absolute scandal."

Although most mortgage lenders applaud the freedom of choice FHA has given them, at least one agreed with the appraisers. Frank Montufar, a mortgage banker in Cherry Hill, N.J., said, "It's human nature" for a loan officer to shun appraisers who regularly come in with lower values than he needs to close loans.

But, Montufar said, given the inherent conflicts of interest in the lender select system, and the potential costs it shifts to consumers and taxpayers, "I think it was a mistake" to abandon the panel rotation system.

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