New conduct code aimed at home appraisals

01.15.09
By Lewis Green

Both lenders and borrowers of home loans may feel more secure about the agreement when a new code of conduct for home valuation comes into effect in May.

According to an article on CNN Money, the code is targeted at fighting inflated appraisals - one of the factors that some experts claim led to the housing bubble and subsequent burst.

The issue at stake may arise when loan officers or mortgage brokers try to encourage home appraisers to overestimate the value of the property under consideration. A 2007 study by October Research indicated that 9 out of 10 appraisers had felt pressured to do so at one point or another.

Why would they do this? Because banks are more likely to approve a mortgage in which the property is worth much more than the loan itself - and the paychecks of brokers and officers rise based on how many loans are approved, the article states.

The new code of conduct was envisioned to combat this practice. Created by the Federal Housing Finance Agency, it prohibits lenders from coercing, extorting, colluding with, intimidating or bribing appraisers into making inflated appraisals.

Fannie Mae and Freddie Mac have said they will only purchase mortgages from lenders who have not violated the code.

Basically, the hope is that new rules will lead to more accurate appraisals and therefore more realistic loans. They may also help banks have more faith in appraisals, which could lead to an increased willingness to lend.

"The agreements should help restore confidence in the mortgage market by enhancing underwriting practices, reducing mortgage fraud and making home valuations more reliable," commented James B. Lockhart of the FHFA when the code was introduced.

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Inflated home appraisals contributed to the housing bubble