After the thrift industry had seen its net worth fall from $16.7 billion in 1972 to minus $17.5 billion by 1980, Congress in 1982 passed the Garn-St Germain Depository Institutions Act. It allowed the thrifts to invest up to 40% of their assets in nonresidential real estate.

The hope was the the industry would be restored to health by the lush underwriting fees that could be charged to commercial borrowers and real estate developers.

The $64,000 -- or $500 billion -- question is: Why did the Garn-St Germain law fail to disastrously?

Invitation to Looters?

Today the act is widely regarded as an invitation to looters in the industry. But nothing could be further from the truth. The act was in reality a desperate attempt to save an industry that was in its death throes.

Neither Congress nor the American people were willing to write off the industry in 1982. And to do nothing would have been to write it off.

As a commercial real estate appraiser present at the start of the crisis, I have some insights to offer.

The assumptions for allowing thrifts to underwrite commercial real estate loans were not unreasonable, since the industry was familiar with realty lending. No area of real estate lending is as lucrative as underwriting the projects of developers, but it also happens to be the riskiest.

An Inability to Gauge Risk

What was not understood in the early 1980s, and is not understood now, was that the industry had undergone a sea change that had rendered it unable to estimate real estate risk.

When I entered the appraisal industry in 1978, almost every thrift and bank that engaged in real estate lending had its own in-house appraisal staff. Today I doubt if 5% do.

The in-house appraisal staff had two functions: to do assigned appraisals and, and by far the more important, to review outside appraisals submitted by would-be borrowers.

Appraisers Fired

No sooner did I enter the industry than it began the long, slow process if firing appraisal staffs wholesale.

The industry had two justifications: To save money -- a dubious assertion -- and to eliminate the supposed conflicts of interest that result from having an in-house appraisal staff. The latter allegation seems would unless you understand how the process works.

Joe the developer has a harebrained scheme. He's convinced that there is a desperate need for a new 16-unit strip mall on the corner of a secondary intersection. Never mind that the other three corners have strip stores with an average vacancy rate of 20%.

After the land has been acquired and plans drawn up, Joe realizes almost as an after-thought that he needs an appraisal. He knows he can find an appraiser who is desperate enough to come up with the numbers he needs to finance the project.

Joe wants an appraisal done by a member of the Appraisal Institute (MAI), the most prestigious designation in the field.

In the old days, Joe's appraisal would have been reviewed by a thrift's in-house team, with the likelihood that it would be shot down. But under the new order, there are no in-house appraisers.

At this point, the thrift could accept the appraisal as is, since it was done by an MAI. Or it could have the appraisal reviewed by an outside appraiser. Often the appraisal would not be reviewed because it was done by an MAI, and therefore regarded as safe.

Dangerous Assumptions

The grim reality is that 80% to 90% of all the foreclosed nonresidential properties held by the thrift industry were done by MAIs. Indeed the industry joke is that MAI stands for "made as instructed."

Let's assume that the thrift had the appraisal reviewed by another appraiser. If that party didn't hold the MAI designation and questioned the appraisal, Joe would say the reviewer was unqualified.

If the review appraiser was an MAI, another problem would appear. MAI appraisers are notoriously reluctant to criticize other MAIs. They are, after all, members of the Appraisal Institute, and to attack an MAI appraisal is to bite the hand that feeds them.

Beyond this is the overarching fear of all fee appraisers, that is, those those not employed by an institution. These independent agents are deathly afraid of saying no too often and earning the dreaded reputation of a deal killer.

Getting back to Joe, he picks the wrong MAI to do his appraisal, one who has a reputation for doing too many appraisals on projects that have been foreclosed on.

But Joe isn't worried. When he visits the next S&L on his list, he doesn't bring his appraisal. Instead he explains his project in general terms to the loan officer. Joe said he knows that an appraisal is required but that he wants the S&L to recommend an appraiser.

Someone Will Take the Job

Every lending institution has a list of about 10 approved appraisers. Joe calls every name on the approved appraiser list and outlines the project and the estimated market value that he needs to make the deal fly. The seventh name on the list is an appraiser who hasn't worked for a month and who tells Joe that he won't have any trouble coming up with the right numbers. Joe now has a deal.

In due course, the S&L will foreclose on another harebrained project, one that in the old days would have been prevented by the thrift's in-house appraisers.

It is now obvious that the Garn-St Germain act failed because in the 1980s the industry systematically dismantled in-house appraisal staffs, which were the only defense thrifts had against disaster.

Anyone who has ever seen the hole-in-the-wall operation that is the typical fee appraisal firm will lose forever any illusions about objectivity. These piddling operations could never have the clout to stand up to the major developers.

These people consider themselves lucky if, at the end of the month, they cay pay all their bills and have a few dollars left over.

Those best able to render objective appraisals were the in-house appraisers at thrifts who had the security of being salaried employees, and who knew that in the long run they would share the destiny of their thrift.

Appraising is a key component of the real estate industry. Billions of dollars are put at risk every year based on our estimates of market value. One would think that we would enjoy a reasonable income and job security. But this is not the case.

Fraud Wasn't Worst Problem

If we are salaried, we are threatened with the loss of our job. If we are fee appraisers, we are told we will never get another assignment.

The frightening thing is that even with all the publicity about the thrift crisis, there is so little understanding of what went wrong. If there had never been any fraud at thrifts, amazingly little would be different. We would still be facing an S&L crisis today.

Almost nowhere in the thrift or commercial banking industries does one see the realization that there will be no safe lending again until in-house appraisal is restored. Sound, objective appraising is a critical component of real estate lending. It is not some small matter that should be farmed out to the lowest bidder.

In the 1980s, I was a staff appraiser for three financial institutions. Today, none of these has an appraisal staff. One of these employers was a small but aggressive three-branch operation that lent out the maximum 40% of its assets on commercial real estate loans that Garn-St Germain permitted.

I regarded my job as secure because I knew how critical I was to their operations. I assumed that they had to know my importance to the operation. In that year I had done appraisals that if done on the outside would have cost about $375,000 - 10 times my annual salary.

But my real value was as a review appraiser, and some that I saw were outright frauds. The operation was lending out a large chunk of its assets based largely on my appraisal decisions.

After I was let go, I wondered who was going to protect them from all the bogus appraisals. The answer, of course, was no one. It came as no surprise to me when the thrift was declared insolvent and taken over by federal regulators in 1989.

Mr. Carach is licensed real estate broker and a state-certified general appraiser in Miami.

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