Real estate appraisers from across the country have read the Bush Administration's proposed new "Appraiser Watch" quality-monitoring plan and they have a unified response: Don't do it!

In an unusual move last week, the nation's major appraisal professional organizations created a new, temporary lobbying entity--the National HUD Task Force--to oppose the government's plan to monitor FHA appraisers using electronic databases of loan default information.

The Department of Housing and Urban Development (HUD) formally proposed the Appraiser Watch plan July 23, and is accepting public comments on the idea through Sept. 23. The Appraiser Watch proposal is modeled after HUD's three-year-old "Credit Watch" initiative, which statistically flags mortgage lenders whose default rates on Federal Housing Administration loans are significantly above average. Lenders or origination branches with exceptionally high rates of borrower defaults within the first 24 months of loan originations can be disciplined, suspended or permanently kicked out of participation in the FHA program.

In its July proposal, HUD said it wants to extend the same statistical, "performance-based" concept to FHA appraisers who perform valuations for loans that subsequently end up in default.

"Just as a consistently higher level of poor underwriting is...linked to a consistently higher level of defaults," said HUD, "a consistently higher level of poor appraisals may be associated with a consistently higher level of defaults."

Lenders or loan origination branches with "early default" rates on loans that exceed 200 percent of the average rate among FHA lenders in their area are subject to special scrutiny and possible disciplinary action under Credit Watch. The monitoring under Credit Watch depends heavily on electronic searches by HUD that identify lenders or origination branches whose default rates exceed the norm.

Appraisers have not spoken out formally yet on the HUD proposal, but last week all the major professional appraisal groups agreed to respond to the agency with a single, loud voice. The National HUD Task Force is comprised of the Appraisal Institute, the National Association of Realtors' Appraisal Committee, the National Association of Independent Fee Appraisers, the American Society of Appraisers, and the Appraisal Guild, among others. They represent the vast majority of the country's estimated 60,000 to 70,000 active appraisers.

The chairman of the 30,000-member Appraisal Committee of the National Association of Realtors, Francois K. Gregoire of St. Petersburg, FL, told Realty Times that HUD "has not established any causal relationship" between appraisal accuracy and the rate of early loan defaults. Poor underwriting--approving borrowers for loans who can't afford them, accepting fraudulent credit and employment information on applications--"is directly related to defaults," and can be monitored statistically as currently done through Credit Watch, said Gregoire.

But appraisal inaccuracy "is not necessarily a contributing factor" in borrower defaults on mortgage payments.

"Appraisers don't make the decision to approve a particular loan," said Gregoire. "We don't see the credit report, we don't see the VOE (verification of employment), so how can you hold appraisers responsible when the loan goes bad?"

Thomas M. Munizzo of the National Association of Independent Fee Appraisers, who heads up the new anti-Appraiser Watch coalition, says the group plans to "work with HUD to come up with positive solutions" designed to weed out bad appraisers. Among the possible recommendations: better monitoring of rule violations such as the use of appraisers who are not state-certified and licensed, as mandated by FHA.

The Realtors' Gregoire suggests that HUD also examine the problem of "appraisal mills" that churn out large numbers of FHA valuations by using low-cost, non-certified personnel to visit the property and check comparables. The appraisal document produced by such mills may be signed by a certified and licensed appraiser, but the actual work is performed by individuals not eligible to conduct appraisals for FHA.

"Most of the bad work is done by a relatively small number" of appraisers, he said. "These are the people HUD needs to go after," and it doesn't require a broad-brush, guilt-by-association statistical approach to achieve that objective.

Published: September 2, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.