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LIANE HANSEN, Host:

One specific issue in the housing market that the federal government is working to clean up is appraisal fraud.

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HANSEN: Just a few miles from Capitol Hill here in Washington, you can walk into the office of Peter Barash. In the 1980s, he was staff director of a House subcommittee that investigated the savings and loan collapse. He looked into the role appraisal fraud played in the losses sustained by the industry.

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HANSEN: Today, Barash is a lobbyist for the American Society of Appraisers, and says he's pleased to see appraisal fraud is once again under the Fed's microscope.

M: Our members and other professional real estate appraisers have been urging appraiser independence reforms for many years.

HANSEN: The American Society of Appraisers represents more than 5,000 professionals. Barash says that as a House staffer in 1989, he worked on legislation that helped to professionalize the appraisal industry. But he says the law did nothing to protect appraisers from undue influence from the mortgage industry.

Appraisers are supposed to provide an independent opinion of a home's value without interference from lenders or real estate agents, but some appraisers complain they are pressured to inflate a property's value to seal the deal.

M: Clearly, appraisers who have succumbed to that pressure are also culpable to some extent, but most residential real estate appraisers are mom-and-pop operations. They depend on the kind of business that they often get from mortgage lenders and others, and so there's a very uncomfortable but real-world temptation to meet the expectations of the folks who hire you.

HANSEN: Earlier this month, a major agreement was signed that could dramatically change the way consumers and the mortgage industry obtain property appraisals.

M: It's really designed to prevent undue pressure on appraisers.

HANSEN: That's James Lockhart, director of the Office of Federal Housing Enterprise Oversight. The agency regulates Fannie Mae and Freddie Mac, the country's largest mortgage lenders. On March 3, his agency joined with New York State Attorney Andrew Cuomo, Fannie Mae and Freddie Mac in signing an agreement to fight appraisal fraud.

Can you give us an example of what you would consider to be a flawed appraisal?

M: Well, oftentimes, especially in the market we just went through in the last two or three years when house prices were inflating very rapidly, an appraiser would have pressure from a lender to make the prices higher so that they could make a bigger loan, if you will, to the people. And it was sort of a frenzy, if you will, for a time, and there was a lot of pressure on some appraisers to, you know, sort of keep increasing the prices more than the market was. And that, you know, has come home to roost as housing prices have come down.

If you got an appraisal that was, say, 10 percent high and you had 80 percent down, you were, you know, already 10 percent shy, and now that prices have come down, some people are underwater in their houses.

HANSEN: How prevalent was this?

M: I think it was - happened throughout the country. I think there's always been somewhat of an appraisal bias to the high side. It happened more than one would like.

HANSEN: And you consider this a factor in the mortgage crisis we're facing now?

M: It's part of the factor. There was a lot of shoddy practices going on - poor underwriting and poor appraisals.

HANSEN: Some appraisers actually blame the lenders and the realtors for the problem.

M: Yes they do, and we've heard that, and that's one of the reasons that Fannie and Freddie have revised their code. And it's really designed to prevent undue pressure on appraisers. It's also designed to make sure that the bank orders the appraisal and not the broker or the, you know, the real estate broker or the mortgage broker.

But they're also designed to help the consumer. You don't want to get into a mortgage if the house is not worth what it says. It will increase, obviously, your mortgage payments; it'll increase your interest payments; but also even potentially your taxes you pay on the house. So it's a consumer protection but also protecting the appraisers as well.

HANSEN: You're - the agency is now in a comment period? You've put the agreement out there, you're waiting to hear from other groups to get their take on it, and if all goes well, the plan is going to take effect in January 2009, is that right?

M: That's correct, although it's really Fanny Mae and Freddie Mac that have the comment period. The comments are coming in to them, and the period's open until the end of April.

HANSEN: I understand there will be a consumer hotline to call.

M: Yes there will be. We're setting up - or Fanny and Freddie are funding a new appraisal institute where people that feel that the appraisers have done something wrong can call in, but also the appraisers can call in if they feel they are getting pressure from institutions to raise their appraisals.

HANSEN: What about the impact on other mortgage companies, non-Freddie Mac and Fanny Mae?

M: Fanny and Freddie tend to be the industry standard-setters because they really are where people come to sell their mortgages after they make them. Fanny and Freddie are now almost 80 percent of the marketplace. So their standards tend to be followed throughout the market, and I think that's a good thing.

HANSEN: How much - I mean, how much do you really think these efforts are going to help? I mean, are we headed toward tougher economic times?

M: Well, I don't make forecasts about the economy, but I think the action within the last week that the Fed took that, that, you know, we took and others have taken will help, you know, moving forward. You know, there has been a lack of confidence and a lack of liquidity in the mortgage market in particular. I think we're going to start to see that get better. You know, the house prices probably have farther to fall, but we're hoping that they start turning by the end of the year or thereabouts.

HANSEN: James Lockhart is director of the Office of Federal Housing Enterprise Oversight. Earlier, we heard from Peter Barash, a lobbyist for the American Society of Appraisers. Barash's group and others will be commenting on the agreement in the next few weeks. And as NPR's Scott Horsley previously reported, new numbers on home sales come out tomorrow. More bad news is expected. Some experts believe the country is in the middle of one of the worst housing slumps in decades.

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