Congress took a major step last week toward eliminating what has been a painful thorn in the side of home sellers, Realtors, home builders, mortgage brokers and appraisers for months.

As part of its financial and mortgage industry reform bill, the House voted to terminate the controversial Home Valuation Code of Conduct (HVCC) once a new Consumer Financial Protection Agency begins operations.

The new agency would assume primary federal responsibility for equal opportunity in credit, real estate settlement procedures, financial disclosures to borrowers, plus unfair and deceptive marketing in mortgages and other financial products.

The giant bill, nearly 1,300 pages long, now heads to the Senate, which is working on its own version.

But tucked away in the depths of the House bill is a section that provides unusually detailed instructions to the director of the new Consumer Protection agency. The legislation requires the director to quickly come with new national appraisal rules and standards covering all transactions.

On the day the new rules are adopted, Fannie and Freddie will be prohibited from using their much-maligned home valuation code.

Fannie's and Freddie's rules have been criticized for producing lowball, inaccurate valuations; cutting appraisers' fees to the point where the most experienced professionals refuse to accept low-pay assignments; plus encouraging the use of inexperienced appraisers unfamiliar with local markets - and a long list of other problems.

The National Association of Realtors and the National Association of Home Builders have fought the code since it was first imposed last spring. Mortgage brokers and appraisers have circulated petitions asking Congress to ban it or impose a moratorium. One petition reportedly pulled in more than 100,000 signatures.

Now the House is on record as favoring the code's termination.

Under the legislation, the consumer agency's rules would require lenders to compensate appraisers their full fees, rather than splitting them with management companies and pocketing part of the money themselves.

It would also allow mortgage brokers and loan officers who are state licensed and registered under the federal “SAFE” law to order valuations and discuss them with appraisers, which they are not allowed to do under the Fannie-Freddie code.

The bill also permits home sellers, buyers and Realtors to ask appraisers to consider alternative market data and comparables without such requests being treated as “interference.”

Whether the Senate ultimately goes along with creation of the consumer protection agency won't be know until next year.

But the House bill should be a warning shot to Fannie and Freddie that their controversial appraisal code may have a very limited lifespan.

Published: December 21, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.