SAN DIEGO — Though it is early in the process, Freddie Mac said it has seen a tangible improvement in the quality of appraisals of loans it buys since the Home Valuation Code of Conduct took effect.

Patricia McClung, Freddie's vice president of offerings management, said at the Mortgage Bankers Association's convention here last week that of the appraisals the government-sponsored enterprise receives, 15% more have come acceptably close to the automated valuation model it runs as a check.

The improved quality of mortgages bought by Freddie and Fannie Mae reduces the repurchase risk for mortgage lenders because of lower defect rates, she said.

The code, which took effect May 1 for all loans bought or guaranteed by Freddie or Fannie, has sparked controversy. It bars mortgage brokers and loan officers from ordering appraisals, which might give them leverage to pressure the appraiser to overstate the home's value.

Many lenders have outsourced the ordering of this work to appraisal management companies. Mortgage brokers and real estate agents have accused these companies of inhibiting a housing-market recovery by hiring appraisers who are inexperienced or unfamiliar with the neighborhoods they work in and thus produce faulty, lowball valuations.

Ezzard Alves, Fannie's director of credit risk, said at the conference that several myths exist about the code. One is the notion that it bars all communication with the appraiser. In fact, the code permits a lender or authorized third party to contact an appraiser with additional information, to seek an explanation for a valuation, or to correct a factual error, he noted.

Appraisals are low simply because values are declining, which was happening before the code took effect, Alves said. As for the claim that management companies are using "out-of-area" appraisers, he said, Fannie and Freddie require the use of appraisers who know the local market.

Marko Berishaj, a vice president at, a Troy, Mich., management company, said the code is not responsible for a rise in appraisal costs. He cited three factors, including supply and demand: more appraisals ordered but fewer available appraisers. In addition, he said, the cost for appraisers to comply with new certification requirements is being passed along. And finally, the requirement for a market conditions report has also added to expenses.

During a question-and-answer session, one mortgage banker said that in her experience management companies are using out-of-area appraisers to do desk reviews and she has had to educate these people.

Kathy Coon, the chief appraiser at FNC Inc., an Oxford, Miss., technology company, replied that if the mortgage banker was using an appraisal management company but had to educate the appraiser it was time to find a different company. But another mortgage banker in the audience countered that, as correspondents, they do not always get to choose which appraisal management company to use. Otherwise, it would be easy to switch, he said.

An issue the industry is still ironing out is how to make appraisals portable when a homebuyer switches lenders during the application process. Bill Dyson, the director of industry and government relations at Citigroup Inc.'s CitiMortgage unit, suggested that Fannie and Freddie ease the way for appraisal transfers by certifying lenders as being compliant with the code.

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