The Office of Real Estate Appraisers (OREA), located within the state’s Business, Transportation and Housing Agency, licenses real estate appraisers and appraisal firms doing business in California. Real estate appraisers are hired to determine the value of a home or property, a vital component when a property is bought or sold.  In addition to licensing appraisers and appraisal firms, the agency also sets guidelines for continuing education of real estate appraisers and registers and acts on consumer complaints against appraisers with its enforcement unit.

The agency was founded to implement a 1989 federal law, the Financial Institutions Reform, Recovery, and Enforcement Act  (FIRREA), which required that appraisals for federally related transactions be prepared in accordance with uniform standards by competent individuals whose professional conduct is subject to review. The federal law was a direct result of the savings and loan crisis of the late 1980s, in which numerous banks and thrift institutions were declared insolvent and subsequently closed or restructured. A subset of the law, Title XI, directed states to create new procedures in licensing real estate appraisers, who establish a market value for a property. In 1990, the California Legislature passed AB 527, the Real Estate Appraisers Licensing and Certification Law, creating the agency and assigning it with the task of creating a licensing and monitoring program that fulfilled the federal mandate.

About OREA (OREA website)

OREA licenses and regulates real estate appraisers and appraisal companies, also known as Appraisal Management Companies (AMCs). 

Licensing

The agency provides information to applicants on how to obtain a license as an appraiser, what education is necessary and which providers teach the required courses.

Under the agency’s guidelines, real estate appraisers may be licensed in one of four ways: Trainee License, Residential License, Certified Residential License, or a Certified General License.

The first step, a Trainee License, allows an appraiser, after completing the required courses (150 hours), to value a property under the direct supervision of a Residential, Certified Residential or Certified General license holder. Those holding a Residential License must have 2,000 hours of work experience of at least 12 months and may appraise one to four family residential properties of up to $1 million in value, or non-residential (e.g., business) property of $250,000 in worth. Certified Residential Licensees must have an additional 200 hours of education, and 2,500 hours and 30 months of work experience. Limits on residential appraisal values are unlimited, while non-residential properties remain at a maximum of $250,000.

The final license, Certified General, allows license-holders to appraise any property  without regard to complexity or value. It requires 300 hours of education and 3,000 hours of work experience, half of which is in non-residential properties. While OREA specifies the education required for appraisers, it does not offer training. It does, however, set guidelines for curriculum and accredit schools. The agency also issues licenses and registers Appraisal Management Companies operating within the state, monitors compliance with the regulations, and registers and acts on consumer complaints against the AMCs.

Regulation

OREA’s enforcement unit investigates the background of applicants for licenses, inquiring into criminal convictions, disciplinary action imposed by other state agencies, or other conduct relating to fitness for licensing. Additionally, clients, homeowners, lenders or other regulators and appraisers may file a complaint with the agency. The complaint may be over technical errors in the appraisal, violation of codes or regulations, inappropriate conduct, or outright fraud. Disciplinary action by OREA may include fines, suspension, revocation of license, or other penalties. The agency makes available on its website links to downloadable forms for registering a complaint, and publishes a handbook entitled Consumer’s Guide: Filing a Complaint and the Investigation Process.

OREA Handbook (pdf)

OREA’s budget of $5 million for the 2011-2012 fiscal year is to be spent largely on personnel and operating costs. Salaries and benefits consume $2.6 million of the budget, some 51%, while the remaining dollars cover equipment and operating expenses. It distributes no funds to any part of the real estate industry, or to groups associated with appraisals. OREA is self supporting, taking in $2.6 million in current license fees and penalties, with the remainder of its costs covered by funds accrued in previous years from fees, penalties and investments.

Corruption and Inflated Appraisals

The Office of Real Estate Appraisers was born in crisis, emerging in 1990 from the savings and loan scandals that shook the public’s confidence in institutions dealing with real estate and housing. Its stated mission: “To protect public safety.”

OREA has remained relatively free of scandal during its short history, but it has not always been free of controversy. In March 1998, the state auditor released a scathing report that found a large backlog of complaints that the department’s enforcement unit had failed to resolve promptly and personnel practices that violated state and federal rules. It attributed the delays to “staffing decisions and turnover and the department’s lack of adherence to internal procedures.” The auditor called the working environment in the department “poor” and warned that departmental policy “is not effective to ensure that only qualified appraisers are licensed.” By the end of the year, Republican-appointed director Robert J. West, an appraiser, had been replaced by an interim director, Jerry R. Jolly, plucked from the Alcohol and Beverage Control Commission by Democratic Governor Gray Davis.

Allegations of ineffectual oversight of appraisers continued, some wondering if the reforms were counterproductive. Ten years later, the real estate industry, for which appraisers are licensed, was rocked by the end of a long housing boom and an unprecedented number of foreclosures as the country slipped into recession in 2008. Among the issues raised has been the role that appraisers may have played in assessing the wildly inflated values of properties, many of which later went into foreclosure. Real estate appraisers, in their defense, point to an influx of newcomers to the California market during the real estate boom that preceded the crash, asserting that the newcomers’ inexperience and poor training, along with pressure by lending institutions to assess high values, were to blame. At the height of the real estate boom, appraisers were under stress to not kill deals. Thomas Putnam, a former analyst with the California Housing Finance Agency, testified in a hearing before the Financial Crisis Inquiry Commission in 2010 that appraisers were often hired by loan officers who “had a direct financial stake in the outcome of the appraisal.”

One such example of the pressure that appraisers cite is the statement in May 2008 by Lawrence Yun, chief economist of the National Association of Realtors: “The increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.”

Ethics and AMCs (by Charles B. Warren, Pasadena Sub Rosa)

1998 State Auditor’s Report (pdf)

Inaccurate appraisals are often at the heart of criticism directed at the office. Richard Green, a professor in the school of Policy, Planning and Development and the Marshall School of Business at the University of Southern California, suggests a solution. “We should not go back to the days when appraisers were basically paid to stay out of the way of the consummation of a deal.” Green proposes that “appraisers should not be allowed to see the offer price of a house,” maintaining that the resultant value placed on it would be truly fair. He also proposes that appraisers use standard deviations in their estimate, allowing for some variance of the numbers they arrive at.

Others agree. In a Washington Post article titled “A Common-Sense Way to Mend the Draconian Appraisal Process,” Harvey S. Jacobs, a real estate attorney, proposed much the same solution, saying “If federal regulators are truly concerned about the quality and independence of home appraisals–a cornerstone of sound mortgage lending–why don't they simply prohibit appraisers from learning the contract price before they perform their assessment of a home's value?” Jacobs also points out that the new rule “permits lenders to own all or part of an AMC [Appraisal Management Companiy]–and to require its loan officers to order appraisals from its own AMC.” 

Over the years, a number of proposals have surfaced to revamp the work done by the office. In 2002, Governor Gray Davis vetoed a bill that would have moved it to the Department of Corporations. In 2004, Governor Schwarzenegger proposed that the office be eliminated. And in 2010, a state Senate committee looked at wrapping OREA into the Department of Real Estate.

OREA, while a state agency, operates to fulfill a mandate imposed on all states by the federal government when it passed the Financial Institutions Reform, Recovery, and Enforcement Act in 1989. Thus, any debate over the agency’s effectiveness or viability must necessarily concern itself with that federal regulation and others that have power over the housing market, as well as the conditions which caused action on the part of Washington D.C.

The Housing Crisis

In the wake of the financial crisis of 2008 in which the collapse of the housing industry played a major role, a great debate developed over every aspect of the housing industry  and continues to this day.  Overvalued appraisals on property were, in part, to blame for the housing crisis. In many cases, mortgage loan officers, real estate agents, borrowers  and others who stood to gain from a transaction exerted undue influence on appraisers. An on-line forum at the Center for Economic and Policy Research by the group’s co-founder, Dean Baker, drew the same conclusion, blaming the collapse on what he called “gassed appraisals.”

Technology’s Role

Additionally, the industry was in the midst of great change brought about by the influx of technology.  Whereas in the past, the local real estate appraiser was the most knowledgeable source of information on property values, the increasing availability of current data on local home sales via the internet has added a new dimension to appraisals. Agents were no longer bound to the local appraisers, and began to use automated models and Appraisal Management Companies (AMCs) in their stead. Often the AMCs were owned by the very institution for which the appraisal was conducted, negating the traditional arms-distant relationship between the appraiser and the lender. A study by the Hudson Institute, a noted think tank, highlighted the technological changes in its February 15, 2007, report, Understated Risk: Are CDOs and Structural Changes in Mortgage Securities Undermining More than the Lending Industry.  “We’ve seen significant changes–the increased use of technology in the industry. The industry has relied on automated valuation models which have dramatically changed the traditional appraisal process. The appraisal process historically was an independent, unbiased process and we’ve moved largely away from that.” 

Federal Legislation

One result of these debates was legislation passed by congress in July 2010 and signed into law by President Obama: the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law is sweeping in nature, and covers a wide range of topics, from credit cards to bond derivatives. Its effect on real estate appraisal methods and California’s OREA is that it essentially changed the manner in which property is done, creating Appraiser Independence Requirements (AIR), to replace the previous methods, called Home Valuation Code of Conduct (HVCC).

Historically, loan officers hired independent appraisers, whom they often knew and had developed a working relationship with, to place a value on a property. The appraiser was usually local and was knowledgeable about the community and the market. Lenders often now bring in appraisers from other areas, or use Appraisal Management Companies (AMCs) who hire appraisers to determine values. These companies traditionally were used primarily for commercial appraisals, but are now increasingly in use for residential real estate.

The Dodd-Frank bill prohibits loan officers from ordering appraisals of property, seeking to isolate the loan officer from any contact with the appraiser. Dodd-Frank therefore encourages the use of AMCs and appraisers from outside the local area.

In the wake of Dodd-Frank, OREA enacted emergency regulations to oversee AMCs which took effect on January 21, 2010, and adopted permanent codes on December 17, 2010. The new regulations are scheduled to take effect on April 1, 2011. Some appraisers welcome the changes brought about by the Dodd-Frank bill. “The new law tries to put appraisers back where they belong–as independent professionals,” says Syndie Eardley, a director at October Research Corporation, a publisher of newsletters for the appraisal industry.

The debate over regulation of real estate appraisal continues, with many arguing that the new regulations create new problems, others that the legislation doesn’t go far enough. Many have argued for years that it is the licensing of professionals, in this case real estate appraisers, that creates the problem, and that a market based solution is a better method.

Will Real Estate Appraisal Management Companies be More Ethical? Not Likely (by Charles B. Warren, Pasadena Sub Rosa)

Anthony F. Majewski, 2000-2008 (acting director)

Jerry R. Jolly, 1998-2000 (acting director)

Robert J. West, 1992-1998