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Talking appraisal reform with the expert.

Retiring Congressman Doug Barnard talks about the appraisal reforms he guided through Congress and about what a "lonesome effort" it was.

CONGRESSMAN DOUG BARNARD (D-GA), an eight-term House Democrat who makes his home in Augusta, Georgia, has championed appraisal reform like nobody else in Congress. His name virtually became synonymous with the need to radically restructure the oversight and regulation of this key profession that provides the critical underpinning to the vast sums of money involved in mortgage lending.

In this interview with retiring Congressman Barnard, done in his Capitol Hill office, Mortgage Banking got his reflections on how the reform process is unfolding in the aftermath of the far-reaching legislative changes that were included in the thrift bailout law.

Q: In your view, are the appraisal reforms and the new regulatory framework established in the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) progressing as you initially intended? If you were redrafting Title XI |the appraisal reform section of the statute~ today, how would you do it differently, if at all?

A: Well, I would have to say that the plan, as it was envisioned and passed into law, |was~ to copy, as much as possible, the Certified Public Accountant certification plan. And by that I mean, that what we wanted to have was an industry-based agency that would come up with the rules and regulations, and we would have an appraisal subcommittee, very similar to the SEC, in enforcing the appraisal standards and in setting up the certification and licensing standards for states to follow. And, so, consequently, we felt that it |was~ a tried and proven process, and one that we could somewhat duplicate, as far as |the~ appraisal |profession~ was concerned, therefore, I don't know how I would change it if I was to go about changing it.

Unfortunately, we had to do something in a short period of time. |And the system we modeled the appraisal structure after~ had been in-being for certified public accountants for over 50 years. And so, therefore, we did not have the tremendous support that the public accounting field had because they had |50 years of~ experience behind them. And all we had behind us was the fact that we had a terrible, terrible savings and loan debacle. And, when you go back and look at it, much of it had to do with faulty and fraudulent appraisals. And the question then arose, How do we correct the situation? And so, therefore, we felt like we'd corrected it by insisting on qualified people doing the appraisals.

Now, I didn't see anything wrong with that. I frankly couldn't see why there would be any objections to having qualified people do the appraisals. We took into consideration that there was going to be a scarcity, possibly, of appraisers in some communities. So we made an allowance for that in our bill. But interestingly enough, we never got the real conscientious support of any of the regulators. The Federal Reserve never got on-stream to support us. The FDIC |Federal Deposit Insurance Corp.~ felt like they were adequate unto themselves. The only support we really got was from the |Federal Home Loan Bank Board~... and FSLIC |Federal Savings and Loan Insurance Corp.~ their insurance arm. They were very supportive and I have to give credit to Ed Gray, who was then the chairman, for his support. But, we never did get any real solid support from the ABA |American Bankers Association~, or the Independent Bankers Association |of America (IBAA)~, or any of those associations. It was sort of a lonesome effort. But the situation, at the time was so bad, and we could account for so many losses because of appraisals, it passed Congress without much of a to-do.

Now, all of a sudden, we have the industry screaming for a higher de minimus rule, meaning, by that, |these groups~ feel like certain loans ought not to have to be supported by either licensed or certified appraisers. To me, that's ridiculous. It is absolutely ridiculous. And my contention is just this: We ask for certain documentation on any loan, especially real estate loans. We ask first of all for a title opinion, we ask for insurance, we ask for a search of a tide, which is the same thing as a title opinion. Then, on a commercial loan, we ask for a financial statement certified by a CPA. All of that has to do with documentation. Well, isn't an appraisal as much a part of documentation as all of these other ingredients?

So my contention is, if we do not need an appraiser, a certified or licensed appraiser for a loan of $100,000 or less, why should we have any documentation? Why don't we leave the whole element of documentation to the industry, to the bank? Now, I know that's ridiculous. I said at the outset that's ridiculous. But it's just as ridiculous to come back in now and tell us that it is unfair for a country be required to have an appraisal of farm property that they are financing without an appraisal. They want to leave it up to the banker. You think we ought to leave appraisals up to the banker? They might as well leave it up to the bank as to whether or not it gets a good title. Or whether or not the property is insured. Or whether or not the person borrowing the money is a good credit.

Q: Is the de minimus rule issue a question of certifying the value of this collateral? Or is it a question of who does the appraisal for some of these country banks, if they can't find certified, licensed appraisers?

A: Let me say this. We made an allowance in the bill, as far as small communities not having the people locally to do the work. We made an allowance for that. But we get just as strong arguments |supporting the need for a de minimus rule level~ from banks in cities of 100,000, 200,000, 300,000, |or~ 400,000 |people~. Their arguments are the same, that they don't want any appraisal for a loan under $100,000. Now, in this day and time the median home--the median home--is going to cost approximately $90,000 to $100,000. That's not an insignificant amount, if you want to know the truth about it.

Q: Mortgage bankers |based on an informal survey done by MBA~ report not being concerned about the de minimus rule issue, one reason being that FHA, VA, Fannie Mae and Freddie Mac--the bread and butter programs used by mortgage bankers--do not intend to have a de minimus rule. Do you think that in light of the fact that the secondary market has expanded so significantly, to the degree that the majority of loans go through those channels, that some of the air is taken out of this debate as far as the extent of the actual impact of this de minimus rule issue? Or, in other words, what I am saying is that many mortgage bankers have not viewed the de minimus rule level as an issue, one way or another. A lot of mortgage bankers look at it as kind of an oddity. Why are they so worried about it? They should get appraisals on everything, anyway. Does that mean that the issue really isn't that important? I mean, if there was a de minimus rule of $100,000, would banks then not do an appraisal? Or is this more of a philosophical argument?

A: I think it is probably more philosophical. I think that banks would get some measure of value. The fact is the former Comptroller of the Currency and I had a very, very strenuous debate. We are good, good friends, we still are. But we had a strenuous debate about this whole issue, and he was telling me that just because they wanted $100,000 de minimis, it did not mean that the banks would not be required to get an estimate of the value. And I said, 'Well, who's going to do the evaluation?' And he said, 'Well, the bankers are.' And I said, 'Well, why can't they become licensed and certified?' And that's a strange thing to me, you know. In some of the big institutions, we have house counsel who are licensed by the bar association of that state. Most of the people who, in big banks, or medium-size banks, do their accounting ...|are~... CPAs. They get licensed and certified. Now, I just think, frankly, that the appraisal, that the licensing of appraisers and certification of appraisers was such a new idea, and it came so fast, that the banking community just was not prepared for it. And did not take much note of it when it was going through the hearing process, and the passage process in Congress.

Q: Do you believe the Appraisal Subcommittee is operating as you intended under the legislation?

A: Well, let me say that I had no preconceived idea as to how the Appraisal Subcommittee should be operated. Frankly, I've had few complaints. I've had very few complaints about the way it is operated. It is operating, I think, according to the law. My major concern was that the Appraisal Subcommittee--the present subcommittee was made up of representatives of the regulators who didn't support the legislation to begin with. And so I always had a question in my mind: 'How conscientious are these people going to be?' And I think that is a subject for continued oversight, as far as Congress is concerned. I may have one additional oversight hearing in my subcommittee before I leave on that same subject. But, generally speaking, they seem to be doing a good job.

When you stop to think that this only got put into law in 1989, and this is less than three years |old and~ all 50 states, except maybe one or two, have passed their own state legislation certifying and licensing appraisers, I think that is an absolutely phenomenal record.

Q: It appears there will be Congressional oversight required of this process. The states have done a great job. The regulators are doing a good job. Is there someone else in Congress that you see that will be taking an interest in the appraisal issue? Is ongoing Congressional attention really necessary?

A: Well, and I say this critically, I don't know that I have cultivated another member whose interest is as intent in this area as mine. I think that as we continue to face the possibility of further and further federal financing of the savings and loan industry and the banking industry, we are not nearly out of the woods yet. I mean, RTC |the Resolution Trust Corporation~ still needs money, we still don't know that the BIF |the Bank Insurance Fund~ is not going to have to have another infusion of capital. As Members of Congress search for answers to continued federal involvement in the financial business, I think that somebody will definitely say that we've got to keep our fingers on this. How do we do that? The best way is to be sure that institutions are safe and sound. That means that they are going to have to have good and strong regulation. And good and strong regulation means that you are going to have to have good appraisers. So, I think that it will be very obvious to a good, conscientious Member of Congress that appraisals are a part of safety and soundness in our institutions.

Q: Along that same line, do you think that it is possible that we'll ever return to a pre-Title XI appraisal environment if Congress fails to adequately oversee the process?

A: I just can't believe that automatically we will see the licensing and certification of appraisers just be eliminated in all of the 50 states. In fact, there are 16 states that have already preceded federal law with certifying and licensing of appraisers. And then, too, I think the appraisal organizations, such as the American Institute now joining with the Society of Real Estate Appraisers, the associations representing appraisers, they are stronger today than they have ever been before. And I think that their lobbying efforts will see to it that we will not go back to any pre-1989 appraisals. I think the present |Appraisal~ Foundation possibly needs to broaden their membership of appraisers.

Q: The Foundation recently made some efforts in that respect.

A: Yes, they have. But there are several organizations, small organizations, who are specialty appraisers, and I think that they should be included.

Q: As far as you can tell, the criteria for sponsorship of the Foundation is still too narrow?

A: I think it needs to be broadened a little bit, yes.

Q: Going back to the pre-Title XI discussion, and your subcommittee's analysis, do you think that real estate depreciation had as much to do with the thrift and bank losses as poor quality appraisals?

A: I guess I would answer that by saying this: we found that in 26 percent of the cases of failed thrifts, fraudulent or faulty appraisals were the principal reason that the institutions failed. But in 76 percent of all the failed institutions there was some element of fraudulent and faulty appraisals. So, you see, that in about a third of the institutions that failed, you can pretty well attribute it--the entire failure--to fraudulent appraisals, especially in Texas and California and Louisiana. But, in three-fourths of all that failed, there was some presence of |faulty~ appraisals. So, yes, I think that it wasn't entirely faulty and fraudulent appraisals. And certainly real estate values did fall. But let me say this, though, those big |drops in~ values didn't |come~ until the middle 1980s. They didn't fall in 1983 and 1984 and 1985. The fact is my subcommittee did hearings back in '83 and '84 on the savings and loans failures. We predicted what was going to happen. At that time, we didn't have the significant real estate value reductions as we did later on.

Q: In some parts of the country, such as Washington, D.C. and New England, which previously were insulated, there has been some significant real estate depreciation. Do you think that FIRREA and Title XI may have had, or may be having, some positive impact already on lenders being affected by those conditions?

A: Well, let me say this: An appraisal is a snapshot of the value of the property as it stands on the date it was made. I mean, we all understand that. The insulation should be that a good institution should get a good appraisal, and it should only lend 90 percent or less of the value of that real estate. I mean, that's what I call good banking. I mean, anybody that loans 100, or 105, or 110 percent of the value of a piece of property is really gambling, because he might just as well take up business in Las Vegas. So, what I am saying is that I think that Title XI would help along with good judgments as to how much money |should be lent~ on a piece of property. And you should insulate yourself with a down payment. First of all, you should insulate yourself with a good valuation. And secondly, you ought to insulate yourself with a good down payment or percentage of that value, as far as the loan is concerned. Between the two of them, I think that you would not necessarily suffer the losses that you have suffered. Surely enough, in some areas, such as the Northeast, they've had unforeseeable declines in their economies. But that's been felt generally, it's been prevalent in a lot of locations. I don't think there's any way that you can offset that. I mean, that's just a problem of the business cycle. We have ups and downs. We are going to continue to do so.

Q: Has the disaster scenario many predicted would happen with Title XI, where you wouldn't be able to find any appraisers, real estate activity would come to a halt, fees would skyrocket and so forth, has this scenario now been largely disproven?

A: Let me say this. Fees have gone up. But, I mean, I don't see anybody eliminating, number one, origination fees; number two, I don't see anybody saying, 'Let's not have a title opinion because it costs too much.' I am not seeing anybody saying, 'Well, let's just not have any insurance because it's too expensive for the borrower.' I mean, yes, it does cost to appraise it, but that should be as much a cost of doing business as the title certificate or insurance.

Q: So you are saying that the improvements under Title XI certainly are worth the price?

A: Sure. I think so.

Q: There have been some technical glitches with appraisal reform, for example, contradictions between the agencies over what should go into an appraisal, reciprocity problems between states recognizing the licensing of other states. Most of them appear to be getting resolved, but are there any problems that your committee has become aware of?.

A: I am not acquainted with any. But, there again, that's the purpose of the Appraisal Subcommittee. The Appraisal Subcommittee represents the major regulators of the country, including the Council of State Bank Supervisors, and if they don't have a good line of communication about what these problems are and cannot resolve them, then they are not carrying out their job as regulators.

Q: Where would you rank Title XI of FIRREA among your legislative accomplishments.

A: I would have to say that Title XI--having passed both Houses and signed by the President--was one of the most significant things that I've accomplished....But, Title XI, the appraisal section, along with some very substantive oversight, I think is certainly one |reason~, why I feel so excited that we've given the savings and loan industry the oversight |that was needed~.... In the Commerce Consumer and Monetary Affairs Subcommittee of Congress we've had a very, very successful oversight experience since 1983 and we have received tremendous commendation from the chairmen of the full committee, formerly Chairman Jack Brooks |D-TX~, and now Chairman John Conyers |D-MI~. They will tell you that our subcommittee has done yeoman's work over the years. We have a vast jurisdiction, but even with the tremendous jurisdiction we've had, we have such a capable staff of attorneys and research people, |that we have accomplished~ a lot over the years.

Q: I've heard you referred to as "father of appraisal regulation." Does that kind of legacy make you feel proud or uneasy?

A: It's according to whom you are taking to. If I am talking to the Appraisal Institute, or the National Society of Independent Fee Appraisers and so forth and so on, I get to be a hero. But here I am a former banker who's come into Congress, and probably should know the issues of the banking industry the most of any sitting member of the Banking Committee. |But sometimes people~ forget the battles that I've fought with the banking industry as far as CRA |the Community Reinvestment Act~ is concerned, and all the regulation, and some of those other areas in which I have been in the forefront. Sometimes those things are easily forgotten.
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Title Annotation:interview with Congressman Doug Barnard on appraisal reform
Author:Brewster, William H.
Publication:Mortgage Banking
Article Type:Cover Story
Date:Sep 1, 1992
Previous Article:Appraisal reform: who will call the shots?
Next Article:Political shake up.

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