It's shaping up to be one of real estate's surprise hot potato issues for 2009: Who chooses appraisers when houses are sold and financed?

Given the huge amount of inflated and fraudulent appraisals that have contributed to the current mortgage crisis, that's a key question.

Just before Christmas, Fannie Mae and Freddie Mac announced their adoption of a revised version of their controversial settlement with New York attorney general Andrew Cuomo. The original version, agreed to last spring, created a strict set of guidelines regulating appraisals on all mortgages purchased or guaranteed by the two companies.

Those rules and procedures were heavily criticized by banks, mortgage companies, appraisers and federal financial regulators, which led to the latest -- and supposedly final -- version.

But already Fannie's and Freddie's new "home valuation code" is drawing controversy, and may well end up as an issue for Congress or the federal courts to resolve.

Why? Tops on the list: Mortgage brokers -- who still account for a significant percentage of new home loan originations -- are totally banned from selecting appraisers. Realtors are also specifically forbidden from having any say or influence over the choice of an appraiser on a sale transaction.

Well, you might ask: Since appraisers in the past have often complained about pressure from loan brokers and realty agents to "hit the number" -- that is, turn in valuations high enough to allow transactions to go to closing -- aren't they happy about the new prohibitions?

They're not.

Many local appraisers have built up long-standing, legitimate relationships with brokers, small lenders and Realtors as sources of assignments. Under Fannie's and Freddie's new rules , they fear, the mortgage business will shift away from local brokers to large national lenders, who'll use big "appraisal management companies" to handle home valuations.

Those management companies, according to a joint statement issued by the four largest appraiser trade groups, are not regulated at the state or federal levels, and "place appraisal quality last," while refusing to compensate experienced appraisers fairly.

Marc Savitt, president of the National Association of Mortgage Brokers, complained that Fannie's and Freddie's policies will "create a severe disadvantage to small business mortgage brokers and prevent them from engaging competitively in the mortgage marketplace."

He hinted strongly that his association, which represents 15,000-plus brokers around the country, will file suit against Fannie and Freddie in federal court.

The new rules aren't scheduled to take effect until May 1. That leaves plenty of time for appraisers, brokers, Realtors and others to rally their supporters on Capitol Hill. And you can bet they will.

Published: January 5, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.