Chapter 3 Commercial Real Estate and the Banking Crises
History of the EightiesLessons for the Future 157
aminers and commercial bankers interviewed about the appraisal process during the 1980s
(see footnote 21). They are followed by a brief description of the reforms legislated in 1989.
In the 1980s, appraisals ceased to be as useful a part of the commercial loan process
as they had been in previous years. During the early to middle years of the decade, when
many markets experienced unprecedented boom conditions and both borrowers and
lenders believed the conditions would continue for some time, appraisers generally went
along with the prevailing inflationary expectations and reflected them in their cash-flow
assumptions and analyses. Thus, appraisals often failed to check or slow down the amount
of funds being committed to specific projects.
The quality of appraisals became less rigorous during the 1980s as rapid expansion
in real estate development led to the hiring of many new and inexperienced appraisers. En-
try into the field required few credentials in the form of academic requirements, training,
or on-the-job experience. Thus, many people with only marginal experience in such com-
plex matters were writing opinions on these subjects. In addition, the appraisal industry
was fragmented into numerous associations and membership designations, with no gen-
eral uniformity in performance standards. Finally, real estate appraisers were mostly un-
regulated during the 1980s: state licensing requirements were nearly nonexistent, and the
federal bank regulators provided little oversight of appraisal procedures or practices at in-
sured institutions.
In some instances the ethical standards of the appraisal process were reported to
have been compromised by fraudulent activity. Appraisers would often fail to render un-
biased, independent opinions. And except in the most egregious cases, appraisers were
generally not held accountable for deficient and/or overstated appraisals. The existence of
malpractice and fraud resulted in major reforms in appraisal procedures involving federal
insured institutions in 1989. (See discussion of FIRREA below.)
On the regulatory side, bank examiners had little formal training in evaluating ap-
praisals and were not in a position to challenge their accuracy. Although examiners rou-
tinely reviewed and evaluated credit-file appraisals and periodically questioned them, in
most instances they deferred to the judgment of the qualified appraiser. Moreover, with
the use of increasingly sophisticated discounted-cash-flow models, appraisal reports were
becoming more complicated and thus more difficult for exa
miners to evaluate.
of Faulty and Fraudulent Real Estate Appraisals on Federally Insured Financial Institutions and Regulated Agencies of
the Federal Government: Hearings, 99th Cong., 1st sess., December 11 and 12, 1985; and House Committee on Govern-
ment Operations, Subcommittee on Commerce, Consumer, and Monetary Affairs, Implementation of Title XI, The Ap-
praisal Reform Amendments of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA):
Hearings, 101st Cong., 2d sess., May 17, 1990. See also the House Committee on Government Operations, Status of the
Implementation of Title XI, The Appraisal Reform Amendments of the Financial Institutions Reform, Recovery, and En-
forcement Act of 1989 (FIRREA), 28th report, 101st Cong., 2d sess., November 14, 1990.