Financial disaster spurs professional regulation
It was the go-go 1980s and the economy was as high as the moussed hair, the mall parking garages, and the Hugo Boss shoulder pads. Americans were feeling confident—in a spending mood—and businesses across the board were doing all they could to encourage it.
Those businesses included more than the Express, Gap, or Hello Kitty stores at your local shopping galleria: They included organizations as seemingly staid as financial institutions, namely savings and loans (S&Ls).
S&LS THROUGH THE YEARS
According to the U.S. Federal Reserve, S&Ls were started in the early 1800s by groups of people who wanted to buy their own homes but lacked enough savings. At the time, banks didn’t lend money for residential mortgages, so S&L members would pool their savings and lend them back to a few of the members to finance their home purchases. As the loans were repaid, funds could then be lent to other members.
As the years went by, these S&Ls remained generally smaller than banks, both in number and in the assets under their control. But they were nevertheless important conduits for the U.S. home mortgage market: In 1980, S&Ls’ total assets were $600 billion, of which about $480 billion were in mortgage loans, making up half of the approximately $960 billion in home mortgages outstanding at that time.
To encourage home buying in the 80s, several changes were made to federal financial regulations, including the express deregulation of S&Ls by the Depository Institutions Deregulation and Monetary Control Act, which gave S&Ls many of the capabilities of banks but without the same regulation or oversight. Instead of spurring the economy and helping homeownership, these actions—especially in the field of Texas commercial real estate—instead set the stage for bad actors and, ultimately, one of our nation’s biggest financial disasters.
Through the decades, real estate appraisers worked hard to provide vital services to both buyers and financial institutions, determining the current value of a property for potential property buyers and lenders, which they still do today. While appraisers in the past were not officially regulated by government entities, several longstanding national and international professional organizations helped encourage and uphold appraisers’ educational and ethical standards.
But without across-the-board, uniform national standards or effective enforcement at the time, S&Ls occasionally caught appraisers in their weird ’80s investment web. One practice was to have two investment partners use an appraiser, who was either presented an investment opportunity or otherwise used unwittingly; the appraiser’s work would allow the investors to buy a property using S&L loans, with the investors then flipping the property to extract massive profits.
As outlined by Investopedia:
“Partner 1 would buy a parcel at its appraised market value. The duo would then conspire with an appraiser to have it reappraised at a far higher price. The parcel would then be sold to Partner 2 using a loan from an S&L, which was then defaulted on. Both partners and the appraiser would share the profits. Some S&Ls knew of—and allowed—such fraudulent transactions to happen. Due to staffing and workload issues, as well as the complexity of such cases, law enforcement was slow to pursue instances of fraud even when they were aware of them.”
S&L-based practices like these helped build a literal house of cards that ultimately collapsed on itself, costing U.S taxpayers an estimated $124 billion, according to the Federal Reserve.
FEDERAL, STATE LAWS MAKE IMPACT
As a result of the S&L deregulation and the industry’s subsequent collapse, Congress adopted Title XI of the federal Financial Institutions Reform, Recovery and Enforcement Act in 1989, which in part mandated states to license and certify real estate appraisers who appraise property for federally related transactions, such as many home purchases. And in response to the federal law, California swiftly established the Office of Real Estate Appraisers—which eventually became the Bureau of Real Estate Appraisers (BREA) under the Business, Transportation and Housing Agency and Department of Consumer Affairs—charging the organization with developing and implementing appraiser licensing and certification programs in compliance with the federal mandate.
Today, BREA—which is entirely funded by licensing, appraisal management companies (AMCs), and course provider fees—focuses on licensing and enforcement:
- The Licensing Unit sets the minimum requirements for education and experience, according to criteria set by the federal government and California law, to ensure that only qualified persons are licensed to conduct appraisals in federally related real estate transactions. Applicants must meet minimum education and experience requirements and successfully complete a nationally approved examination and background check. Pursuant to SB 237 (chapter 173, statutes of 2009), the Licensing Unit also performs background checks on appraisal management companies in order to register them as required.
- The Enforcement Unit investigates the background of applicants, licensees, and registrants to ensure they are fit for licensure. The Enforcement Unit also investigates complaints of violations of national appraisal standards filed against licensed appraisers and violations of laws and regulations by AMCs.
Plus BREA is responsible for the accreditation of educational courses and course providers for real estate appraisers. BREA has reviewed and approved over 1,800 pre-licensing and continuing education courses. In addition to the real estate appraisal-related courses offered by California’s community colleges and universities, more than 90 proprietary schools provide appraiser education.
“The Bureau is the largest appraiser and AMC regulatory program in the U.S.,” said Bureau Chief Jim Martin. “It is mandated to fulfill its mission to safeguard the public trust by promoting professionalism in the appraisal industry through licensing, education, and enforcement.”