This settlement will force lenders, real estate agents, mortgage brokers, title companies and appraisers to break old habits that have been breaking laws -- laws long on the Legislature's books of mortgage dos and don'ts.

Since the early 1990s, community groups, followed by federal regulators, have railed against lenders who have targeted mostly low-income, minority and elderly borrowers with misleading marketing and intense pressure to purchase high-interest loans. For the past three years, similar warnings against inflated appraisals have been issued from not just activists and regulators but also from the appraisers themselves.

By the year 2005 well over 8,000 appraisers signed a petition claiming that lenders and others involved in the mortgage loan process were pressing them to "hit the number" on properties sold in communities all across the country. In 2003, a leading provider of market intelligence to the real estate services industry, October Research, surveyed 500 appraisers who said over half of them had been pressured to inflate values by up to 10 percent, at the request of someone who stood to gain from the increased price -- everyone with the exception of the borrower and the appraiser, who receives a flat fee for services.

In 1994 the Agencies that regulate the housing industry, which includes the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) issued Interagency Appraisal and Evaluation Guidelines that provided guidance to both examiners and regulated institutions about prudent appraisal and evaluation programs.

In 2003 the same agencies and the National Credit Union Administration (NCUA) issued an Advisory Letter on the subject of Independent Appraisal Valuation and Functions. It stated that a key element of a bank's appraisal and real estate program must be that the appraisers selected are independent of the transaction, and not subject to internal or external influence.

In other words, the regulators told lenders: Ensure that the people setting the price are not influenced by those people who benefit from a higher-priced loan.

In response, Ameriquest, like many lenders, did little more than allow production to dictate valuation practices, and while many of those ill-gotten practices have been covered-up by a rapidly increasing real estate market, in a declining market they will lead to disaster.

Insulating appraisals from external pressure requires major structural and systematic changes. I have worked in the appraisal business for over three decades and strongly urge all of us in the mortgage, real estate and appraisal industries to do the following:

• Create appraisal processes that are managed and audited not by those who report to production executives; but to the Chief Financial Officer, or the Compliance Officer.

• Create a "Brick Wall" between appraisal staffs and production, mortgage brokers or real estate agents. Appraisers must go through a re-certification process on a regular basis to stay abreast of federal, state and local laws governing appraisals and industry trends in real estate valuation and appraisal technologies.

• The use of appraisal vendors that also receive thousands of dollars from title premiums, only if the loan is made, must be monitored.

• Selection of valuation products should not compromise the safety and soundness of lending practices.

• Automated Valuation Models (AVMs) and Brokers Price Opinions (BPOs) can and should not, in many circumstances, take the place of a valuation completed by qualified independent local fee appraisers.

House prices are declining in many cities across the country. As a result, homeowners are losing equity in their homes. Given increasing concerns about rising defaults and foreclosures in 2006, especially on homes highly leveraged by home equity loans or financed with zero-down/interest only mortgages, it is time to finally take real action to stop improper valuation practices. Every Chief Financial Officer, Chief Compliance Officer, General Counsel and Auditor need take notice and action, using Ameriquest as their bellwether.

Published: January 9, 2006