Home-Appraisal Rules Stire Ire

Less than three months after new rules for home appraisers kicked in, the real estate industry is in uproar.

Realtors, home builders, mortgage brokers and the appraisal industry itself all agree the rules are causing problems. Some are backing a bill in Congress to kill them.

The new guidelines bar mortgage brokers from ordering appraisals themselves, forcing them to do so through a mortgage lender. Lenders may order appraisals through in-house staff or appraisers hired by outside firms knows as appraisal-management companies. But neither may talk to the appraisers about the value of the property they're evaluating.

Since they went into effect May 1, the rules have created unintended consequences that critics say are causing delays in closing sales, or undermining sales because botched appraisals are coming in too low.

"This thing is not only preventing, it's destroying the housing market," said Marc Savitt, president of the Nation Association of Mortgage Brokers.

After a buyer and seller agree on a price, the buyer applies for a mortgage, The lender orders an appraisal to ensure the value of the property, because if the borrower defaults the property will be sold to satisfy the debt. The appraisal fee is usually paid by the buyer.

To determine what a home is worth, the appraiser compares prices of similar homes that were recently sold in the area and makes adjustments for different features. If the property appraisal comes in below the agreed-upon price, the buyer usually has to make up the difference.

The rules, dubbed the Home Valuation Code of Conduct, are meant to eliminate conflicts of interest that created pressure on real-estate appraisers to inflate the value of a property. Lenders, agents, and brokers have been known to pressure appraisers to "hit the number" that the home buyer and seller agreed on so the deal would close and everyone could collect their fees. Inflated appraisals were partly blamed for fueling the housing bubble.

But under a settlement last year with New York Attorney-General Andrew Cuomo, Fannie Mae, and Freddie Mac agreed only to buy loans from lenders that don't directly hire appraisers. The move sent shockwaves through the industry because Fannie Mae and Freddie Mac own or guarantee about half of the U.S. home loans.

So lenders started giving more business to appraisal-management companies, which critics say draw appraisers from a pool of candidates willing to do the job for less money and who,in some cases, may be unfamiliar with the neighborhood

Written by Alex Veiga of Associated Press, seen in Arizona Republic business section on 7/15/09