Laws designed to stop unscrupulous behavior sometimes have loopholes, through which shady characters are quick to leap. Then new rules are needed to fix flaws in the old ones. The case against real estate appraiser Larry Holzer — or to be more precise, former appraiser Holzer — illustrates the problem.
In 2007, Florida regulators permanently revoked Holzer's appraisal license because he had approved an error-filled valuation done by a trainee under his supervision. But nothing prohibited Holzer from starting a company that hired other people to appraise property.
Holzer did just that. And he wasn't the only one.
New rules that take effect Friday are meant to plug the loophole.
Leaders of appraisal management companies will be subject to background and fingerprint checks to operate in Florida, just as appraisers are now. The officials must also disclose criminal histories, license revocations or suspensions from other states. The state can deny licenses to people with criminal records.
Appraisal management companies have recently come under fire. A federal agency filed lawsuits accusing two large companies of hiring unqualified appraisers to value high-end real estate during the housing boom across the country. Nearly 100 Florida appraisers were listed in the suit.
The new rules are designed to prevent unscrupulous appraisers from opening firms that hire other appraisers in the Sunshine State. Florida expects 700 companies to apply for yearly licenses starting Friday. The firms will be subject to discipline by the Florida Real Estate Appraisal Board.
"It's substantial," said Fran Oreto of Port Richey, board chairwoman. "I think it is good for the state of Florida. Accountability is good."
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Appraisers played a role in the housing boom — and bust.
They fueled the boom by working with mortgage brokers and real estate agents to deliver unrealistic appraisals so minimally qualified or unqualified people could buy homes. After the crash, the federal 2009 Home Valuation Code of Conduct prohibited lenders from dealing directly with appraisers.
The new regulations on appraisal management companies come from the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act, which requires states to regulate those companies. So far, 25 other states besides Florida have enacted laws to regulate the companies.
But already, there's another loophole.
Appraisal management companies owned by federally regulated institutions, like Bank of America and Wells Fargo, are exempt from state registration.
John Huston, president of Las Palmas Appraisal in St. Petersburg, called the new requirements a "standard Band-Aid approach" and said they will not solve the industry's problems. Some of the appraisal management companies are forcing experienced appraisers out of work by greatly reducing the fees for valuations, he said.
"All the old-school guys are gone," Huston said. "They're not going to work for that money. Everything was set up to help the banks, not the consumer."
In Florida, individual real estate appraisers are regulated by the state appraisal board. They are subject to application requirements and can be disciplined for performing faulty work. As of March, about 7,500 appraisers held active licenses; 6,000 others are inactive. The new rules put the appraisal management companies under the same sort of regulation.
As for Holzer, he contracted with a New York firm to hire appraisers but never paid the appraisers after lenders paid him. He has since filed for bankruptcy.
Frank Gregoire, a St. Petersburg appraiser, served on the Florida Real Estate Appraisal Board for eight years during the housing boom. Consumers, the former chairman said, should be protected from individuals with criminal or disciplinary problems.
"They should expect nothing less from appraisal management companies," Gregoire said. "I believe the regulation in Florida is absolutely, positively essential."
He predicts that appraisers will now file complaints against management companies that try to dictate values and the comparable sales used in valuations. The companies, Gregoire said, are more concerned with fees, not quality.
He added: "Florida law guarantees appraiser independence."
Mark Puente can be reached at firstname.lastname@example.org or (727) 893-8459. Follow him at Twitter at twitter.com/markapuente.