See Also: Downsizing in Retirement

The new act eliminates federal guidelines known as the Home Valuation Code of Conduct (HVCC), which critics say often result in underpaid, less qualified appraisers valuing—and often undervaluing—properties in unfamiliar markets.

Essentially, the code, implemented in May 2009, requires banks or mortgage brokers that sell loans to Fannie Mae or Freddie Mac to get appraisals through independent appraisal management companies.

The goal was to end chummy relationships in which lenders or real estate agents selected appraisers and could encourage them to return inflated valuations that would justify high loans. Inflated home values were blamed in part for the collapse of the housing market, which helped bring on the current recession.

But critics say the HVCC caused the valuation pendulum to swing too far in the other direction, toward artificially low numbers. Many appraisers guard against accusations of pumped-up valuations, while some highly experienced appraisers won’t work for low fees paid by the appraisal management companies.

The financial reform bill calls for the HVCC to end in October and requires that “reasonable and customary” fees be paid appraisers. The change may provide a slight tonic for sluggish home sales.

“We think it will have an impact,” says Lucien Salvant, public affairs managing director for the National Association of Realtors. “Not a large impact, but it will make the real estate closing process move smoother and quicker.”

John Mechem, spokesman for the Mortgage Bankers Association, is taking a wait-and-see approach to the multifaceted financial reform package. Until the Consumer Financial Protection Bureau and other enforcement agencies created by the massive legislation are up and running, he said, it is “hard to know what the impact” will be.

Low-ball appraisals hurt retirees

Older Americans making a transition from independent living to retirement communities or downsizing to smaller homes have been affected.

After moving into a senior community in Brentwood, Tenn., Tom and Charlotte Ritter decided to sell their second home, a 3,000-square-foot house in a golf-course community in Bonita Springs, Fla. Originally listed at $639,000, the recently renovated house languished for 18 months as the bottom fell out of the real estate market. After twice dropping the price, the Ritters accepted an offer for $440,000, but that deal collapsed when an appraiser valued the home at less than $400,000.

Jim Boeglin of Coldwell Banker Residential Real Estate in Bonita Springs said the appraiser cited as a comparable property a nearby house of the same size and age that was in poor condition, had a history of termites and had sold as a distressed sale.

Such deal-busting appraisals have caused Boeglin to take the previously unheard-of step of asking sellers to accept lower-priced offers from buyers who do not need a mortgage.

“If we can get an all-cash deal that does not require an appraisal, we’ll try to get our customer to accept less money rather than subject themselves to the risk of an appraisal that will blow up the deal,” said Boeglin.

Next: What appraisers look for. >>