The Government Accounting Office has come to the same conclusion many home builders have: the home loan appraisal process remains flawed.

“Some 20 years after the passage of Title XI [which establishes rules about appraiser qualifications and independence] questions remain about the oversight of the appraisal industry and the quality of appraisals,” says the recently released GAO report.

Appraisal fraud, the deliberate overstatement or understatement of a home’s value, remains a concern. Of the 816 mortgage fraud cases the FBI closed from the fourth quarter of 2010 to the third quarter of 2011, 92 involved appraisal fraud, the report said.

And there are still worries within the industry that the increased use of appraisal management companies, which are often accused of focusing more on the bottom line and quick processing, is sacrificing quality, the report continued.

A much-simplified summation of the GAO’s study is that the appraisal process needs better monitoring. The National Association of Home Builders (NAHB) agrees and said there is evidence that the flawed system is continuing to hamper the home building industry’s recovery by derailing sales.

A recent NAHB poll showed that one out of three builders surveyed lost signed sales contracts because of flawed appraisals. And a National Association of Realtors survey conducted last fall found 18% of Realtors reporting recent contract cancellations or delays as a result of a low appraisal.

“The current system is not working,” said NAHB Chairman Bob Nielsen in Nation’s Building News. “We must resolve a flawed appraisal process that produces inaccurate assessment of home values because this fosters price instability, puts more families in danger of default or foreclosure, and undermines the housing and economic recoveries.”

The GAO specifically looked at the workings of the Appraisal Subcommittee, which is tasked with monitoring states’ compliance with Title XI  as well as monitoring appraisal requirements of the federal financial institution’s regulators. The GAO concludes that the subcommittee hasn’t developed clearly defined criteria for assessing whether states are complying with Title XI, and the subcommittee's monitoring of compliance has been limited.

The subcommittee was also faulted for lacking policies to evaluate whether the activities of the Appraisal Foundation, a non-profit organization that gets government grants and sets the criteria for appraisers and appraisals, are related to complying with Title XI.

In its defense, the GAO report points out that the Appraisal Subcommittee is funded by fees paid by appraisal registration fees, which have dropped off as appraisers left the industry. To make matters worse, the subcommittee got more duties under the Dodd-Frank Act. It is now charged with creating a national appraiser complaint hotline and provides grants to state appraiser regulatory agencies, which have complained they are under-funded. The report expresses concern over whether the subcommittee will be able to meet those requirements with its current resources.

In addition, the GAO expresses concern that the subcommittee might not have the teeth it needs to enforce the regulations anyway.

“These findings underscore the need to establish an effective oversight system to ensure that appraisals accurately reflect true market values and don’t harm aspiring home buyers or builders,” says NAHB’s Nielsen.

Teresa Burney is a senior editor for BUILDER magazine.