WASHINGTON -- Could the controversial appraisal system imposed nationwide by mortgage giants Fannie Mae and Freddie Mac last May -- and now tied to lowball property valuations, busted home sale transactions, and higher fees to consumers -- be on its way out?

It just might be. Under a bipartisan amendment approved Oct. 22 by the House Financial Services Committee, the "Home Valuation Code of Conduct" would be terminated early in the existence of a proposed new Consumer Financial Protection Agency.

The amendment would require the agency's director to replace the code with an improved set of rules developed through the regular administrative procedures and public comment periods used by all federal agencies. The valuation code, by contrast, was the product of a settlement among New York Attorney General Andrew Cuomo, Fannie Mae, Freddie Mac and the two quasi-private companies' regulator, the Federal Housing Finance Agency.

Cuomo agreed to back off from an investigation of Fannie's and Freddie's appraisal practices in exchange for their adoption of a set of valuation rules. The code's core purpose was to ensure "appraiser independence" from loan officers, lenders and brokers who wanted them to "hit the number" needed to get the mortgage funded, even if it meant inflating the actual value.

Though virtually no one disagrees with the goal of appraiser independence, critics say the code went overboard and created its own set of problems. According to homebuilders, real estate agents and consumers who signed protest petitions, the code has encouraged many lenders to use appraisal management companies, some of them owned by or affiliated with the lenders themselves.

Those management companies, in turn, often pay appraisers much less than their standard fees but hit homebuyers and refinancers with full charges or higher at closing. An appraisal management company, for example, might pay $175 or $200 for a valuation the appraiser previously received $375 or $400 to complete. The management company then would charge the consumer $400 or more at settlement, pocketing a large portion of the difference.

Management companies argue that they bring significant value to the equation -- assembling networks of appraisers, making assignments, and handling administrative tasks. But realty agents and homebuilders say the system often causes more harm than good. The appraisers who are willing to work for rock-bottom fees tend to be less experienced, and more likely to accept assignments far from their geographic areas of competence, they claim. Continued...