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Relief for Inflated Home Appraisals

The Federal Housing Finance Agency (the FHFA, the government agency that was created to oversee Fannie Mae and Freddie Mac) announed a plan last week to reduce the pressure that loan originators (i.e., lendors) have exerted on appraisers in the past to over-value homes.

The new Home Valuation Code of Conduct will take effect in May 2009. The FHFA aims to improve the reliability of appraisals for mortgages sold to Fannie Mae and Freddie Mac, and the Code will prohibit lendors from coercing, extorting, colluding with, or bribing appraisers into making inaccurate appraisals.

Previously, appraisals have been inflated because higher values ensure that a home is worth more than the amount of the loan, which thereby reduces a lender's risk. Also, the incomes of mortgage brokers and loan officers are determined by the number mortgages are approved.

Enforcement of the new Code will be critical. If the new regulations prevent the abuse of appraisals it could have a healthy impact on the housing market because lendors will have more confidence that home values are accurate, which will in turn make them more willing to lend.

We at NeighborCity.com will be reporting, evaluating, and commenting on new trends and regulations that impact the real estate market, so check back to this community page on a regular basis!

-Sarah Bailey, CFP (R)
NeighborCity.com Team