Homebuyers in Hawai'i may have been given mortgage loans based on inflated appraisals derived under pressure from lending and real estate agents.

Appraiser coercion is described as part of a national problem that quietly evolved over the past decade or so and helped undermine housing markets around the country, though to a much lesser degree than fraudulent loan practices and subprime lending abuses.

Observers believe such coercion may have artificially boosted Hawai'i's rapid run-up in home prices between 2001 and 2006, and put the local housing market at a higher risk of falling.

A state regulatory agency and local appraisers testified about the industry pressure during a recent state legislative hearing on Senate Bill 2407 that intends to make it illegal for anyone with a financial stake in a real estate transaction to influence an appraiser.

"There is something wrong with the system, and we need to fix it," said Jose Diogo, owner of Kaua'i-based Diogo Appraisal Services Inc. "It's a vicious cycle of pressure."

Appraisers play an important role in the residential real estate market because lenders typically won't issue a mortgage for more than a home's appraised value, less a down payment. Appraisals too far below purchase prices can derail sales from which mortgage and real estate agents earn commissions.

Inflated appraisals also could mean people were encouraged to pay too much for homes, which potentially could reduce any gains — or increase any losses — on resales.

MANY REPORT PRESSURE

According to published reports, a 2006 study by Richfield, Ohio-based mortgage and real estate research firm October Research Corp. found that 90 percent of 1,200 appraisers nationwide said they had been pressured to raise valuations, up from 55 percent in a smaller 2003 survey.

In the more recent survey, October Research said 71 percent of appraisers reported being pressured by mortgage brokers and 56 percent reported pressure from real estate agents.

Alan Taniguchi, executive officer of the state agency that licenses and regulates real estate appraisers under Hawai'i's Department of Commerce and Consumer Affairs, said mortgage originators are applying "tremendous pressure" on appraisers.

But Taniguchi said the problem is underreported because of appraisers' fears that they will be blacklisted by real estate lending or sales agents in Hawai'i's small, tight-knit industry.

Sara Thompson, an appraiser on Kaua'i, said in written legislative testimony that on several occasions she was told by mortgage brokers that they would use another appraiser if she didn't comply with their terms.

In one appraisal assignment, Thompson said she was told to remove comments about health and safety issues that she submitted in an appraisal.

"I lost business because I did not succumb to any of these requests/demands," she said in her testimony.

Diogo said most local lending and real estate agents avoid influencing his work. He said much of the pressure is from Mainland lending agents doing business in Hawai'i.

In some cases he said he has been asked to appraise a property at a specific value needed to make a loan work, to appraise property above an agreed-on sale price and to eliminate references to property damage.

"It is a problem that needs to go away because it does interfere with our purpose in the mortgage lending industry," he said. "It seems like the lending industry gained so much power, and they have abused that power."

BANKERS OPPOSE LAW

Gayle Ishima, legislative committee chairwoman for the Mortgage Bankers Association of Hawaii, said appraisers should address the issue themselves.

"It's an ethics issue for appraisers," she said. "It doesn't seem like you would need to add (a law that would punish lending and real estate agents) on top of it."

Richard Hagar, an appraiser from Washington state who tracks mortgage and appraisal fraud and helped write mortgage industry laws in that state, said laws similar to the one being considered in Hawai'i are badly needed. He estimates that around 20 states have laws prohibiting coercion of appraisers, and said several states are considering such legislation now that many housing markets around the country are crumbling.

Hagar, an appraiser for about 15 years and a licensed real estate agent for about 25 years, said pressure on appraisers historically wasn't much of an issue because appraisal orders mostly came from banks.

But he said pressure grew massively in the last decade or so as the mortgage origination business shifted to predominantly independent agents and unlicensed solicitors, while lenders sold more and more of their loans to investors.

Under state regulations governing many real estate industry professionals, including sales and lending agents, it isn't illegal to request or demand that an appraisal be made at a certain value.

Federal regulations governing financial institutions prohibit the practice, while some companies have internal policies against influencing appraisers.

Appraisers say they get pressure mostly from mortgage brokers who, unlike real estate agents and mortgage bankers, aren't licensed and regulated by the state.

"They have nothing that tells them what they can or can't do," said Scot Voronaeff, owner of Kailua-based appraisal firm Premiere Valuation and a past president of the Hawai'i chapter of the national trade association Appraisal Institute. "There definitely aren't any penalties."

For appraisers, too, no laws prohibit accepting assignments offered with implied or expressed conditions to meet a contrived valuation. But appraisers are bound by professional standards to make accurate independent appraisals.

UNSCRUPULOUS WIN

Appraisers said that refusing conditional appraisal assignments costs them business, while ignoring conditions can leave an impression that an appraisal was influenced. In some cases, mortgage solicitors have refused to pay for appraisals that don't result in a loan being granted.

The pressure, appraisers said, fostered an environment that attracted and rewarded unscrupulous appraisers.

Diogo and other local appraisers said there needs to be a law that helps eliminate the source of coercion.

Sen. Gary Hooser, D-7th (Kaua'i, Ni'ihau), introduced SB2407, which would make such influence illegal and subject to penalties. He said he was shocked by initial testimony on the bill, which he said he introduced at the request of a constituent who is an appraiser.

"I didn't really understand the scope of the problem," said Hooser, who is a licensed real estate agent. "I've learned there are some real issues here that need to be dealt with."

The bill was discussed at a public hearing on Feb. 4 by a consumer affairs committee. Hooser said he is proposing amendments to the bill based on testimony. A decision on whether to advance the bill was deferred until today.

Reach Andrew Gomes at agomes@honoluluadvertiser.com.