Inflated home appraisals were one ingredient in the toxic stew that overflowed onto our economic stove, if you'll permit me a Dave Barry-like analogy. Enter the Home Valuation Code of Conduct, New York Attorney General Andrew M. Cuomo's plan to change the process using the heft of Fannie Mae and Freddie Mac.

The code, which went into effect last month, prohibits "lenders and third parties from influencing or attempting to influence the development, result, or review of an appraisal report," at least if they want to sell to mortgage giants Fannie and Freddie. The idea is that appraisals will more likely reflect true value if lenders, brokers, agents, etc., aren't suggesting to Joe Appraiser that $504,999 is an excellent number for anyone who intends to do any business with them again.

But many industry folks -- including appraisers -- aren't happy about the rules. As The Wall Street Journal reports:

The code bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. This has encouraged lenders to outsource the selection to appraisal-management companies, or AMCs, which take a sizable cut of the appraisal fee. As a result, appraisers are under pressure to "do it faster, do it cheaper," said Bill Garber, a spokesman for the Appraisal Institute, a trade group.

 

The National Association of Realtors' Lawrence Yun says "stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment." The National Association of Mortgage Brokers proclaims, "Tens of thousands of consumers have already been robbed of their opportunity to enjoy historically low rates by Attorney General Andrew Cuomo’s rule." The appraisal management companies, critics say, don't seem to care if the appraisers they pick know anything about the neighborhoods in question.

News that U.S. Reps. Travis Childers (D-Miss.) and Gary Miller (R-Calif.) are co-sponsoring a bill to put the Home Valuation Code of Conduct on an 18-month moratorium was met with some loud cheers Friday. (You can follow some of the chatter here, at Mortgage News Daily.)

But though it doesn't think the code is "ideal," the Appraisal Institute is not amused by all the talk of faulty appraisals. It issued a press release after the NAR blamed appraisers for lower-than-expected May sales numbers:

Bill Garber, Appraisal Institute Director of Government and External Relations, said: "We take offense with the notion that the appraisal is only good if it happens to come in at the sales price. That mentality helped cause the mortgage meltdown to begin with. The fact that the appraisal does not match the sales price is not the fault of the appraisal but a fault of the market today.”

Have you had personal experience with the appraisal process since May 1 as a buyer, homeowner or industry pro? Let me know what you think of it, and of the bill to put the code on ice.

Lenders, mortgage brokers, Wall Street wizards, buyers, sellers, real estate agents and the federal government have all come in for a share of the finger-pointing after home values began rapidly falling. The Center for Public Integrity, an investigative journalism group, suggests adding the appraisal process to that list.

Dozens of appraisers tell the center "that for years lenders across the United States have pushed them into inflating the value of homes to justify higher mortgages. ... In addition, the Center has obtained copies of lenders’ 'blacklists' containing the names of thousands of appraisers; some appraisers say lenders used those lists to exclude those who refused to inflate home values."

The Center also found many appraisers who say they bowed to lender pressure to “hit the numbers” in order to remain in business. These appraisers, along with the lenders who pressured them, helped pump air into the housing bubble that led to widespread economic devastation, according to dozens of appraisers, lenders, and others with intimate knowledge of home loan practices.

The Home Valuation Code of Conduct, which takes effect next month, is supposed to deal with such problems by, for instance, banning "loan origination staff from ordering appraisals directly" for mortgages Fannie Mae and Freddie Mac can purchase. But appraisers tell the center that this will do nothing but direct business to them through middlemen who can pressure them just as effectively as the lenders did.

So what's the solution? Weigh in.