You Get What You Pay For

I don't mean to scare you talking about dishonesty and lawsuits. But this is how the whole idea of Federal and State regulations and licensing came about for real estate appraisers. During the 1980's real estate prices were rising through the roof, (pardon the pun). The banks and savings and loans kept lending mortgage money on over priced real estate transactions. A possible reason for this is that they figured that they couldn't lose money. If the buyer didn't make the mortgage payments then the lender could foreclose. If that happened, then the property would be worth more than the bank had lent on it and they would make a profit anyway.

Well, that's not how it turned out. Everybody ended up losing in a big way. When the recession hit the economy in 1989 an awful lot of banks lost billions of dollars due to real estate loans that had gone sour. The Savings and Loan bailout was estimated to cost over 250 billion dollars. Banks could foreclose on the properties but they couldn't resell them to get their funds back. Everybody loses in that type of situation including the homeowner, the bank, the economy, the local town, etc.

The whole reason the Resolution Trust Corporation  (RTC) was created was to take over insolvent banks. After taking over these banks, the RTC would try to sell the bank assets to investors to recoup some of the losses. The Federal Deposit Insurance Corporation, FDIC, and the Federal Savings and Loan Insurance Corporation, FSLIC, had to pay the depositors in the insolvent banks. Customers that had bank accounts were paid the insurance amount for their deposited money. Any funds that the RTC could not recoup with the sale of assets from insolvent banks were left to the American taxpayer to pay.

To try to prevent this whole mess from ever happening again, the Federal Government made some new rules. The government had to regulate some occupational group involved in the real estate industry. Since the banks and savings and loans were already regulated, they looked at real estate appraisers. In 1989 Congress passed the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), more commonly known as the Savings and Loan Bailout Bill. Title XI of FIRREA set up a real estate appraiser regulatory system involving the Federal government, the States and The Appraisal Foundation. The Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council has the authority to ensure that the States and the Foundation meet the requirements that the States use certifying appraisers and the standards of professional practice to which appraisers are held by the States (the Uniform Standards of Professional Appraisal Practice - USPAP).

Many bankers felt that they would not have made many real estate loans which ended up being foreclosed on if the appraisers had been more cautious during the 1980's real estate boom. The bankers felt that the appraisers erred because they kept arriving at inflated estimates of market value in their reports. On the other hand, many appraisers felt that many bankers and mortgage brokers had unfairly pressured them in the 1980's. The pressure on the appraisers was to arrive at high estimates of market value in their reports. The high estimates were necessary in some reports so that the lender or broker could grant the mortgage loan and earn a profit or a commission fee. Before the Federal requirements, just about anyone could call themselves a real estate appraiser. The only way to differentiate between appraisers and to measure their competence was to ask if they were designated by one of the large appraisal organizations that existed.

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