Nicole Baldwin almost lost a good deal on a home in Springville because of confusion over new rules aimed at protecting borrowers from inflated appraisals.

The new Home Valuation Code of Conduct for appraisers, which took effect May 1, is supposed to reduce appraisal fraud and prevent inappropriate pressure being placed on appraisers by loan originators. Unrealistically high appraisals, which are part of the lending practices that powered the housing boom and contributed to its crash, fueled the foreclosure problem because borrowers ended up owing more than their houses were worth.

Recognizing how the property valuation process contributed to the housing turmoil, the federal government set up the new code to relieve pressure on appraisers in order to make appraisals more reliable. But critics say the pendulum has swung too far the other way. Low appraisals, or those that come in under the price a prospective buyer has agreed to pay for a property, are hindering sales, they say.

In Baldwin's case, it almost scuttled her home buying process.

That's because the low appraisal, which came in a few days after both parties had gone under contract, almost caused the seller to break off the deal. On top of that, the extra time taken to renegotiate a deal and tighter underwriting standards caused Baldwin's loan to be delayed.

"The seller already priced the home very low to move it fast. We had offered the asking price and asked for $3,000 of closing costs to be taken care of by the seller. But the appraisal came in at $5,000 under that price, which surprised all of us and forced the seller to lower the asking price and remove the concession on closing costs," Baldwin said.

"We would have lost our chance because the seller was thinking of breaking the contract with us, and it took two additional weeks to work things out with the seller and appraisal company. Plus, it didn't help that loans now take longer to get out of underwriting because of tighter credit requirements, and so we couldn't get our loan out on time by the closing date," she said.

Had a relative not stepped up with funds to help her buy the home, Baldwin said she would have lost the deal.

Since the new code took effect, the National Association of Mortgage Brokers, one of its biggest critics, has blamed confusion over the law for delaying residential property closings and costing its members business at a critical time during the longest recession since the Great Depression.

Low appraisals, along with rising interest rates, a glut of foreclosed properties and the highest unemployment rate since 1983, join a list of obstacles standing in the way of a rebound in housing.

Realtors blame new code

Many local Realtors and mortgage brokers made similar claims, saying a number of appraisals are coming in below agreed-upon sales prices, derailing many home sales. But no hard numbers are available, they say, because there is no mechanism to provide accurate data on how every home is sold in Utah.

Craig Morley, vice chairman of the Utah Real Estate Appraiser Licensing and Certification Board, puts the blame on appraisal management companies -- which he said the new code designates as a firewall between appraisers and loan officers to prevent improper influence.

The problem, he believes, is that these companies sometimes hire appraisers unfamiliar with a local area because they work for less or can quickly turn around the job.

"Deals are dying unnecessarily because of lowball appraisals caused by actions taken by the appraisal management companies," said Chris Kyler, CEO of the Utah Association of Realtors and a legislative lobbyist for the Utah Association of Appraisers.

Among the alleged problems: Appraisal management companies are filtering or modifying the original appraisal before giving the information to the lender and asking appraisers to work outside their area of geographical competency, he said.

Baldwin questioned why an appraiser from the Salt Lake City area was sent to assess her home in Springville, about 50 miles away.

"He didn't know our area," she said. "My home is located in a nicer neighborhood where the [homeowner] turnover isn't high. But the appraiser based his report on a home that was located a few blocks away, that sold in the last three months for really low. And he refused to consider another comp that was sold a year ago, but located just a few houses from ours. There were also two other homes listed on the report that were about two miles away in a completely different neighborhood that was more run-down."

Whether the appraiser is geographically competent or familiar with the history of home prices in a particular neighborhood is a question that needs to be addressed, Morley said. He said most appraisers don't use comps that are more than six to eight months old because they're fearful the sales won't reflect current market values.

"Why is an appraiser from Salt Lake going to Springville when there are already many appraisers living in that area and who are familiar with it?" he asked. "If the appraiser isn't aware of differences in the neighborhoods because they're not routinely working in the same area, or not adequately verifying information about the property, it could result in an artificially low assessment. And if this causes the borrower to miss closing dates on loans or attractive interest rate lock-ins, it can be very costly."

Appraisal management companies dispute

Jeff Schurman, executive director with the Title/Appraisal Vendor Management Association, which represents appraisal management companies and others in the settlement services industry, downplayed the criticism.

"In the six months before and after the new code was implemented, the percentage of appraisals whose market values did not meet sale prices of subject property hasn't changed," he said, citing the association's data. "So the argument that Realtors and mortgage brokers are losing deals because of the new code is just not the case."

Instead, Schurman said much of the unhappiness over the new code stems from what he believes is the loss of the mortgage brokers' and loan originators' ability to influence the appraisal process.

"The new code isn't something the appraisal management companies advocated. But the good thing is that the code keeps the appraiser at arm's length from the loan originator or mortgage broker," he said. "Now, the mortgage brokers aren't happy because they can't influence the process through the appraisal management companies."

"The appraiser's job is to reflect what's going on in the market today. Home prices in many areas are still falling. A lot of homes sold are distressed properties. Plus, lenders' underwriting guidelines are stricter now than ever. The appraisals are coming in low not because of the appraisal management companies, or the new code, but because the market is what it is right now," Schurman said.

In an effort to dispel confusion over the new code, Fannie Mae and Freddie Mac, which provide funding for the bulk of U.S. home mortgages, on Wednesday posted clarifications on their Web sites.

Among other things, the two government-backed mortgage investors told mortgage lenders that appraisers must have experience in the geographic areas where they get assignments. They also said the code doesn't bar appraisers from talking with real estate agents.

"Realtors can often be a source of data in the market," Fannie said on its Web site.

Why was the new code drafted?

The new code was initiated after a year-long investigation of mortgage fraud by New York Attorney General Andrew Cuomo. In 2007, he prosecuted the giant home-mortgage lender Washington Mutual for working in collusion with a large appraisal firm. That led to an agreement from Fannie Mae and Freddie Mac to only buy mortgages from banks that follow the code.

Among other provisions, the new code bans loan brokers and officers from selecting appraisers.

"In order for mortgage fraud to work, you have to have appraisal fraud. That's because the appraiser is the gatekeeper. You can get a real estate agent to put together a phony real estate contract, and the lender to falsify the borrower's financial information. But if the appraiser doesn't come in at a falsified purchase price, the transaction won't go through," Morley said. "The subprime problem couldn't have happened if there were legitimate appraisals."

Not surprisingly, the new guidelines have led to more conservative valuations by appraisers, many of whom have what Morley calls "an attitude that it's bad to give a high appraisal, but it's OK to be low."

"Appraisers need to be on a moral high ground. But we have so many foreclosures and distressed property sales that it's hard to know what the market value really is," he said.

Rick Lifferth, past president of Utah Association of Appraisers, agreed.

Given that a significant part of the housing problem was caused by appraisers who signed off on artificially inflated home values, it takes a lot of nerve for the Realtors to demand that appraisers now ignore market prices in order to let them sell houses, he said.

Lerron Little, a Realtor and owner of Capstone Real Estate in Provo, disputed his criticism.

"We're not asking appraisers to cheat. We're asking them to look at actual market valuations and get it right, because that's where the problem seems to be. I can't see how it's objective if the person doing the appraisal doesn't know the marketplace."

Lifferth argued that the new code provides "some protection for appraisers to do their job without fear of reprisal, that is, they don't get paid or don't get work again."

"Appraisals have become critical to the livelihood of Realtors because if they don't hit their numbers, it can kill the deal. Are the Realtors and mortgage brokers just unhappy because they don't get to pick their appraisers anymore, or the values aren't where they want it to be? I don't know," he said.

"But market conditions are very erratic. Whole subdivisions are in foreclosure in many parts of the country, and sometimes, those are the only things that are selling. So appraisers can't ignore that."

And if the Realtor or other parties disagreed with the appraisal, they should send it to the state Division of Real Estate for an evaluation, Lifferth said.

Regulating appraisal management companies

Since appraisal management companies aren't currently regulated by the federal government, the Utah Legislature passed HB 152 this year, which gives the state Division of Real Estate jurisdiction over the licensing and regulating appraisal management companies. The new regulations will take effect by Aug. 8.

"We don't want fraud to shift from the mortgage brokers and appraisers to the appraisal management companies, which currently aren't regulated," Morley said. "The new state rules prohibit appraisal management companies from influencing appraisers, modifying finished appraisals before giving them to banks, or prohibiting the companies from restricting appraisers talking to appropriate parties to produce an accurate appraisal."

"Managers of appraisal companies would have to go through FBI checks, and they have to disclose how much in fees they keep and how much goes to the appraiser. If they violate the rules, the state division can revoke or suspend the company's license to operate in Utah and impose civil penalties," he said.

While title/apprasial association's Schurman supported the new state legislation, he said most appraisal management companies would have preferred to be regulated on a federal level.

"The absolute best thing is to have this done at the federal level because with potentially 50 different statutes on registration and licensing, it'll make compliance and reporting cumbersome," he said.

Why appraisers are unhappy

Appraisers too aren't happy about the increased role of appraisal management companies under the new code.

They complain that appraisal management companies sometimes take hefty fees that discourage experienced appraisers from working for them. These companies take a sizable cut of the appraisal fee paid by consumers, leaving less for the appraisers. Some companies pay as little as around $200 for appraisals, compared with the $400 or more that many appraisers were used to receiving, they said.

"Because most appraisal management companies take 40 percent to 60 percent of the appraiser's fee, there's no real incentive to do a proper job because the appraisers aren't paid much," Lifferth said. "Because of their bottom-line-oriented approach, the appraisal management companies put a lot of pressure on appraisers to meet their production quota. The appraisers are not getting enough time to do the job properly, and if they are late, they get penalized $50 of their fee."

Schurman disagreed, saying most appraisal management companies take 10-40 percent of the appraisers' fee to cover their costs and ensure quality.

"In return for the fee split, most appraisers get a regular volume of work from appraisal management companies and their marketing costs are covered," he said.

Moratorium on new code proposed

With the new code sparking so much discontent, the National Association of Realtors, the National Association of Home Builders, and the Appraisal Institute have thrown their support behind a federal bill that calls for an 18-month moratorium on the federal code.

"Because there are a lot of misconceptions about the new code, we've proposed that Congress impose a hold so we have time to come up with solutions to the unintended consequences it caused," Kyler said. "Utah was among the first few states to get engaged with this issue because buyers and sellers here are devastated when they find out their transactions are dying, not because of their own fault but because of federal regulations that are gumming up the appraisal process, and therefore financing as well."

"The new code is not the root of all evil," Kyler said. "But the way it is being interpreted or carried out by the appraisal management companies is what's causing these problems."

Schurman disagreed.

"Everything from the code to the appraisal management companies are being blamed when it's really market conditions that are still in flux that's causing the problem. Sales just aren't as robust because buyers are more hesitant to buy, and sellers are still asking too much for their property. Imposing a moratorium on the new code isn't going to do any good because you're just putting a moratorium on a symptom rather than the fundamental problem."

N.Y. attorney general Cuomo's office maintains that the rules are necessary and that critics are using the appraisal rules as a scapegoat for a declining housing market made worse by the recession.

"With homes prices falling and foreclosures rising, this complaint is simply wrong and risks returning us to a corrupt system filled with conflicts of interest that promoted artificially inflated values," Emily Browne, a spokeswoman for Cuomo, told The Associated Press. Browne added that there's no evidence of a spike in appraisal delays in the two months that the rules took effect.

Still, Lifferth asked if there was any point to the moratorium, considering the new code expires in July 2010.

Getting the moratorium to pass may take a long time because Congress is consumed with health care issues now, Kyler acknowledged.

"But at least we have HB 152, which gave the state Division of Real Estate jurisdiction over the appraisal management companies," he said.

On the Net:

• Fanny and Freddie's clarifications about new code: http://www.tavma.org/images/hvcc_notice_7_22_09f.pdf

• FAQ on the new code: http://www.realtor.org/government_affairs/gapublic/gses_hvcc_announced?lid=ronav0022

• Title/Appraisal Vendor Management Association: http://www.tavma.org/index.php?option=com_content&task=blogcategory&id=2&Itemid=23