Washington continues to wrestle with one of the thorniest issues of both the housing boom and the housing downturn: What's a piece of real estate really worth, and who says so?

At a House financial services subcommittee hearing last week, appraisers complained that pervasive attempts to interfere with their work -- by loan officers, Realtors, builders and others --distorted home valuations in some areas during the boom years.

They asked Congress to pass reform legislation that would create federal rules banning pressure on appraisers and increasing penalties on anyone who interferes in a property valuation.

But at the same hearing, the president of the National Association of Home Builders took appraisers to task for being a major part of current problems in pricing unsold inventories of houses.

Joe Robson said appraisers in 2008 and 2009 “have often used sales of homes in foreclosure or other distressed property sales as comparables for new homes without making the appropriate value adjustments.”

Failure to make those adjustments, he said, depresses the true value of newly constructed houses, worsens the downward spiral in new home sales, and unfairly devalues entire neighborhoods.

Meanwhile controversial new rules governing appraisals are scheduled to take effect May 1 for all loans originated for sale to Fannie Mae and Freddie Mac, unless a federal lawsuit filed in U.S. District Court in Washington blocks them.

The suit by the National Association of Mortgage Brokers challenges Fannie's and Freddie's “Home Valuation Code of Conduct” because it bans mortgage brokers from any involvement in the selection or hiring of appraisers.

The association, which represents 20,000 brokers around the country, wants the court to throw out the new code, charging that it would “directly reduce the ability of mortgage brokers to provide consumers with an efficient and cost-effective means of (shopping) for a mortgage.”

In a conversation with Realty Times, mortgage broker association president Marc Savitz said absent an injunction, after May 1 home buyers and refinancers may need to pay for appraisals from every mortgage company or bank they shop. Under current rules, by contrast, a broker can obtain one appraisal at the consumer's expense and use it to shop multiple wholesale lenders for quotes.

The suit also asks the court to declare the entire process followed by Fannie and Freddie in devising the code illegal. Both companies and their federal regulator have declined to comment on the suit, but note that they routinely issue guidelines to lenders on all underwriting and appraisal procedures, and the code is no different.

Published: March 16, 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.