Real estate appraisals have been dogged by allegations of undue influence and outright fraud throughout much of the past decade. But new financial reform legislation aims to resolve many of the seemingly intractable issues.
The Dodd-Frank Wall Street Reform and Consumer Protection Act should result in more reliable appraisals, according to Ken Chitester, a spokesman for the Appraisal Institute in Chicago.
"The new law will protect consumers by encouraging the use of highly trained and competent real estate appraisers with much-needed resources for oversight and enforcement," he says.
According to Lucien Salvant, a spokesman for the National Association of Realtors, or NAR, in Washington, D.C., the law is intended to:
- Strengthen appraiser independence.
- Sunset a problematic industry agreement known as the Home Valuation Code of Conduct, or HVCC.
- Regulate appraisal management companies.
"All of those are positive things," Salvant says.
Appraisals may seem an arcane subject, but appraisal reform should be of interest to homebuyers and homeowners. An improper valuation can derail a buyer's mortgage or a homeowner's refinance loan.
Buyers, sellers can inform appraisers
The end of the HVCC is one major component of the new reform.The HVCC was supposed discourage the practice of lenders putting inappropriate pressure on appraisers to value properties at a certain price. But the code had some unintended consequences.
For example, thanks to the code, many more appraisals were ordered through appraisal management companies. These businesses take a sizable cut of the appraiser's fee and have sent appraisers out to properties far afield from neighborhoods they know well. As a result, these appraisers have been undervaluing homes, putting countless potential sales in jeopardy, according to critics of the HVCC.
Appraisers and realty brokers are likely to applaud the HVCC's demise, which will happen as soon as the new federal regulations are in place. However, the change may not have a dramatic effect on homebuyers and sellers since parts of the code already have been incorporated into the lending guidelines of Fannie Mae, Freddie Mac and the Federal Housing Authority.