New rules on appraisals jeered by some

An anticipated boom in mortgage refinancings and signs that the prolonged decline in home sales and prices may be reaching bottom make accurate property appraisals key to the economy's recovery.

But new rules governing appraisals, adopted by Fannie Mae and Freddie Mac to bring an end to a New York investigation into why so many risky mortgages were made during the boom years, are being jeered by segments of the housing industry.

The regulations - which are known as the Home Valuation Code of Conduct and became effective May 1 - prohibit lenders from using their own appraisers for any new and refinanced mortgages they generate, and bar mortgage brokers from choosing or paying appraisers.

Among the complaints voiced against the changes are that:

The typical appraisal cost will increase about $200, though the appraiser in the field will be paid $125 less to do each evaluation and will need to make up the difference in volume.

Appraisals must be paid for up front, before their actual cost is known. In the past, this fee was paid at closing with all the others.

Critics of the new rules say lower fees will result in inaccurate valuations as less-experienced appraisers, employed by unregulated appraisal-management firms, work in neighborhoods with which they are unfamiliar.

"I understand the concern about fraud, but I have more of an issue with how and where they find comps [comparable sales] to determine prices," said Christopher J. Artur, who has been selling real estate in the city's Mayfair neighborhood for more than 30 years.

Veteran appraiser Michael Frolove of Abington said the new rules "will be a disaster for everyone - consumers, lenders, real estate agents, as well as appraisers."

"In the end, they will destroy relationships I've spent 40 years of my life developing, make appraisals more expensive and less accurate, and will do nothing to weed out the bad people," he said.

Because lenders may no longer have direct relationships with appraisers, appraisal-management companies will take on a major role, to assure independent determinations of value.

Yet Marc Savitt, president of National Association of Mortgage Brokers, said: "All the new rules have done so far is to raise costs for consumers [through] delays in approval of loans with [rate] lock-ins. Underwriters complain that many of these appraisals are of poor quality and must be done again, again falling on the consumers."

Appraisal-management firms such as Springhouse L.L.C. of St. Louis argue that increased costs to consumers are minimal, and that they are necessary to defray the expenses involved in training thousands of new appraisers and processing large numbers of appraisals.

The fact that New York Attorney General Andrew Cuomo "was able to impose this [the new rules] on 49 other states," as Frolove put it, remains a point of contention.

Last year, Cuomo, a former HUD secretary, got Fannie Mae, Freddie Mac, and their new overseer, the Federal Housing Finance Agency, to agree to the changes. In return, he dropped his investigation into how Fannie and Freddie signed off on bad loans made by now-defunct Washington Mutual Inc., which, the probe showed, used appraisers from third-party firms.

In a letter late last year to the Office of Federal Housing Enterprise Oversight, the Mortgage Bankers Association, the American Bankers Association, and consumer groups argued that one state should not be permitted to make rules for federally regulated institutions.

A major problem with the new rules, National Association of Realtors president Charles McMillan said, is that they come with no enforcement mechanism.

Under their agreement with Cuomo, Fannie Mae and Freddie Mac must establish an "Independent Valuation Protection Institute," at a cost of $24 million, to monitor compliance. But that body has not yet been set up, and officials declined to say when it might be.

On April 29, U.S. Rep. Paul Kanjorski (D., Pa.) tacked an amendment onto the proposed Mortgage Reform and Anti-Predatory Lending Act that would regulate appraisal-management firms by setting national standards for accountability. The bill is still under committee consideration in the House.

Cuomo has said he supports the amendment because "we have seen the very problems with appraisal-management companies that the amendment seeks to prevent."

Appraisal Institute president Jim Amorin said the "intrusion" of appraisal-management companies into the financing process could "potentially extend the problems in mortgage lending rather than solve them."