Real estate agents and appraisers are coming under increasing scrutiny as regulators look to see what role they may have played in the subprime mortgage problem that is threatening to drag down the U.S. economy.
In Indiana, regulators expect consumer complaints to rise as foreclosures increase. There already has been an upsurge in disciplinary charges against real estate agents and appraisers, which predates the current mortgage crisis.
As chairman of the Indiana Real Estate Commission, Valparaiso Realtor Tim Reed is in a unique position for assessing the effect the subprime meltdown. His commission oversees licensing for 46,024 real estate brokers and sales representatives.
Reed discusses the issue and tells what real estate agents can do to bolster public trust in their profession.
Q: What role do the state real estate commission and the appraiser board play in preventing real estate fraud in Indiana?
A: We are basically the regulators. We enforce the laws, the rules and regulations of Indiana license law. And then we also act as the judiciary panel that sanctions licensees. We are the advocate of the consumer and enforce Indiana license law.
Q: How does that prevent some of the fraud we've heard about? Say in the worst case, where the appraiser is getting a kickback from the mortgage broker who is also getting a higher commission out of it.
A: If that happens we're going to take that person out of the business. I mean we have several individuals over the years that have had to make another career choice because real estate was no longer an option for them. Even in the initial application process ... anyone who has a conviction prior to us issuing a license we have to look into the nature of the conviction. And then we have to make a decision whether this person should be entrusted to serve the public.
Q: We are hearing a lot about real estate fraud in connection with the subprime meltdown. What direct role does the commission play with that? Are you finding much outright fraud as people come to you?
A: Not really. It's usually a specific violation. I think that is going to change though. We haven't even seen the tip of the iceberg on the foreclosure issues. Because many of those loans that originated, they are just starting to default now. So, I think that we are going to see a lot more consumer complaints. ...
That person who is closing on their home, they are not upset, because they have a new home. But they'll become upset after they go into foreclosure and then they'll start filing the complaints. And then they'll go into the pipeline. And so I don't think we've seen the full brunt of the problem yet.
Q: The numbers of appraisers and real estate agents brought up on charges has increased dramatically in past three years. Just 20 in 2004 versus 186 two years later. What has led to that big increase in Indiana?
We went for years without the proper staffing for investigators and then ... we established the investigative fund, which is basically through an assessment on real estate licensees. ... this money allowed IPLA (Indiana Professional Licensing Agency) and the attorney general's office to hire investigators. And now we have people out in the field on a daily basis monitoring activities. That, of course, is going to lead to more charges being filed.
I think in a lot of cases it's not a matter of there is more fraud in our industry, as just there is more enforcement.
Q: Just 29 percent of real estate licensees brought up on charges in 2005 and 2006 were actually prevented from doing business by suspension or revocation. For appraisers, the percentage was a little lower. Why are most still in business?
A: It's the nature of the complaint. Many times a complaint by a consumer is simply a misunderstanding between the parties or is not a violation. ... We have to look at Indiana licensing law and say, OK, if these actions were true, based on the complaint, would it be a violation? And many times it's not. Many times we close the file because it could be something as simple as they didn't keep an appointment, and we've had those type of complaints. It's bad manners, but it's certainly not a violation of license law. And then if the attorney general's office does file charges, there are other avenues besides suspension or revocation, as far as reprimand or probation.
Q: Do you think with the current climate ... do you think that rationale could change? Do you think you may have more severe punishments coming?
A: I think the commission does a nice job at giving the proper punishment to fit the crime. The license (law) says that we have got to be consistent in our sanctions, meaning if there are three people that do the same exact thing we are pretty much required to have the same exact punishment. There is no set standard that says if this is the crime this is the punishment.
(Reed gave the example of a licensee falsely certifying he or she had complied with continuing education requirements. That has consistently resulted in about a two-year suspension and $500 fine, because it involves perjury.)
Q: I notice that with the appraiser board the Web site (IPLA Web site that publishes discipline on licenses) is a big concern. That has almost become like a punishment in itself.
First of all, it serves the consumer, so if they are worried about a licensee, they can go to the IPLA Web site and see if they are currently under suspension or if they have had past actions against them. As I see it, I wouldn't want to be a broker that has my name published on that Web site.
Q: What is the primary mission of the real estate commission as you see it?
To safeguard the public. We truly are a consumer protection agency. And actually I think that's how the rules read: "To safeguard the public through enforcement of license laws."
Q: What's your role for licensed brokers and others. ... Do you have a duty to the people that appear before you? To the industry?
Other than to be fair, no.
Q: How long have you done this job?
I was appointed by Govenor Bayh in 1992 as a member of the commission. I served as chairman for first time in 1998 and I'm currently on my third term (as chairman).
Q: What's the toughest part of serving as first a commission member and then as chairman of the Indiana Real Estate Commission?
Separating my business from the real estate commission. Because even though I'm a practitioner, and that's what I do for a living is sell real estate, many of the rules we pass and enforce could affect our business. You have to wear the right hat. ... And what might be beneficial to the Realtor might be detrimental for the consumer. And I always have to take the consumer role.
Q: Why do you do it?
It is a passion. I like doing it. ... I just like professionalism in my business. Because I think the real estate business, I think Realtors as a whole, don't carry the image they would like to (in) the public perception. And I like to do everything I can to raise the bar on our profession.
Q: How big a role do fraud and shoddy real estate work play in the current problems with the subprime market?
It's a significant role, but (at the same time) it is a small role. Because so much of the subprime market is the refinancing market and that doesn't involve the Realtor or real estate agent in any way. Our role (in this) is more the lesser-qualified buyer. For years, when I first started in this business, to get a loan, you had to have a down payment, you had to have a job, you had to have good credit. And then we got to the point, ... if you could fog a mirror, you can get a loan.
Q: What problems do fraud and these less-than-ethical business practices by some create for honest appraisers and brokers?
Well, especially the honest appraiser, they have had so much pressure over the years in "bringing in the value." And so you have this honest appraiser, that is they do it the right way, they are not going to receive business from the lender. If a lender has an appraiser who continually brings in the value under what they need, then they will quit using them and they will find someone who is willing to do it. ... You know, it's not what is the property worth, it's how much do you need?
As far as the licensee goes, it hurts the honest licensee, because now all of sudden these homes go into foreclosure. And being from Northwest Indiana, I'm sure you're familiar with the foreclosure market. That house on that street that is now a foreclosure affects the value of everybody.
Q: What's the best piece of advice you ever received in the real estate business?
Actually, it goes all the way back to when I started, because I started in real estate when I was 20 years old. ... I didn't think I was going to make it because I was too young, and my original principal broker told me that was my greatest asset. ...
(And) educate yourself. I mean licensing is the minimum standard and the people that are the most successful are the people that further their education with Realtor designations like their GRI (Graduate Realtor Institute) or their CRS (Certified Residential Specialist) or their CRB (Certified Real Estate Brokerage Manager). ... I'm required to do 16 hours of continuing education ... and I bet you I do over 100 per year. Not because it's a state requirement, but because there are a lot of good ideas out there I haven't heard yet.
Q: When it comes to dealing with clients and ethics, what message would you like to send to real estate professionals in Porter County, in Northwest Indiana, right now at this time?
Really it comes down to ethics. If you're a Realtor you adhere to the (Realtor) Code of Ethics, which is really a much higher standard that of the law itself. ... And if you follow the Code of Ethics, it's virtually impossible to ever have a complaint filed against you. The Realtors code of ethics ... is basically the golden rule of real estate.
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