So, why has appraisal fraud gained the foothold that it apparently has in the mortgage granting process? Is anyone watching the store? According to the Demos Report, there are a lot of people who might be or maybe even are watching, but few who have both the power and the motivation to crack down on abuses.

The Demos reports, "Home Insecurity: How Widespread Appraisal Fraud Puts Homeowners at Risk," which we have been profiling over several days says even as evidence of misconduct in the preparation of appraisals has mounted, neither the federal government nor most states have moved to fix the system.

The federal government is the most likely candidate since the Federal Deposit Insurance Corporation, Office of the Controller of the Currency, and the Federal Reserve all play a roll in banking regulation, and Freddie Mac and Fannie Mae, while publicly traded corporations, still must answer to the Office of Federal Housing Enterprise Oversight. However, Demos charges that federal efforts in the area have been ineffective and that recent U.S. Treasury standards calling on lenders to respect the independent judgment of appraisers do not carry the force of law. The federal government also has little control over mortgage brokers who originate the lion's share of mortgage loans.

The states have also dropped the ball, only a few even have laws that deal with lender pressure on appraisers. Many states, in fact, do not license mortgage brokers or originators.

Appraisers, in contrast, are regulated by both state and federal agencies, but much of the regulation is concerned with appraisal standards and appraiser training. Appraisers complain that the regulations under which they operate are not at all concerned with the pressure they claim they are constantly under from lenders and real estate agents.

Appraisers may not even know where to go to file a complaint when they are confronted with pressure to act unethically. Lenders, as stated above, are either totally unregulated or are governed by multiple federal and state agencies. Real estate agents are licensed by the state, but the licensing authority is sometimes merely a mechanism for collecting business fees rather than a true regulatory agency. The National Association of Realtors through its state and local member boards does mediate disputes and will sanction members for ethical lapses, but its mission is really that of a trade association not a watchdog.

Increasingly appraisers themselves have been turning to the FBI with complaints of lender pressure and both that agency and its parent Justice Department have investigated complaints in several states. But the Demos report claims that the big reason that real estate/mortgage industry regulators have not, themselves, been more aggressive in addressing the problem is the lack of resources available to them. The report states:

"According to a 2003 study by the General Accounting Office on oversight of the real estate appraisal industry, state agencies overseeing appraisers only have an average of three staff members. The report, which surveyed all states, found that "about two-thirds of the states said that they needed additional funding to conduct investigations, and over three quarters said they needed additional staff'."

Demos does not cite specifics about the resources available to the regulators of other industry actors, but, in the context of the report, it would appear that those resources are also limited.

So what is to be done?

The principal recommendation of the Demos Report is "that there should be an independent and thorough investigation of the scope and causes of appraisal fraud by an appropriate federal agency" to "be mounted in collaboration with state regulators with input from a range of actors in the mortgage industry. A set of reform proposals should be developed from this process."

But, in addition to suggesting yet another study, the report does a credible job of suggesting a framework for such reforms:

• Ensuring appraiser independence. This would, in part be done by reducing or eliminating contact between appraisers and lenders/brokers. Demos does not, however, offer any suggestions for how this might be done.
  
• Punishing any of the actors in the mortgage process for pressuring appraisers. There must be two other preliminary steps: state and federal laws or rules expressly prohibiting such pressure and the establishment of a regulatory framework to hold all parties accountable.
  
• Sanctioning dishonest appraisers. Ethics are not always enough when one's livelihood is at stake. Appraisers must feel that their competitors will not be rewarded for unethical behavior. Knowing that everyone, including the competition, faces a serious threat of penalties such as loss of license, would go a long way toward empowering appraisers to stand up to pressure.
  
• Streamlining the complaint process. This could be done by providing a point of contact in each of the agencies that regulate a piece of the mortgage industry so that appraisers or others will know where and how to register complaints.
  
• Increasing Enforcement Capacity. Whatever regulatory changes are made, there must be regulators with the authority and the resources to enforce them.
  
• Educating consumers. Homeowners will ultimately pay the price when and if the real estate boom ends, and particularly if it ends disastrously. They need to be aware that the high appraisal that allows them to buy with minimum money down or refinance with cash out may not ultimately be in their best interests. As the Demos report states, consumers have been "urged...to treat their home equity like a bottomless ATM" and have "unwittingly encouraged appraisal fraud by pressuring lenders to wrap up deals quickly while paying no attention to the appraisal step, and by readily accepting higher levels of financial risk that is prudent.

In the final part of this report a few appraisers will speak for themselves about the pressures they sometimes encounter in their work.

The complete Demos Report can be accessed at www.demos-usa.org.