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A temporary federal regulation instituted in 2009 to keep coercion, bribery and fraud out of the home appraisal process has riled the group it was designed to protect: appraisers. Now the Federal Reserve Board of Governors is in the process of implementing an almost identical set of rules permanently.

The 2009 regulation, known as the Home Valuation Code of Conduct (PDF), was intended to create a firewall between mortgage brokers and home appraisers. Under the regulation, mortgage brokers must order an appraisal from an appraisal management company, which then randomly selects an appraiser in the area.

Under the newly adopted appraiser independence requirements, a mortgage broker must prove it’s compliant with the rule on any mortgage sold to Fannie Mae or Freddie Mac, owners of about 85 percent of mortgages in the U.S. The rule will take effect Dec. 27, and everyone must be compliant by April 1, 2011.

“Before, the appraisal order would come with a dollar figure so the appraiser would know what the loan was being proposed for,” said David Beard, a local appraiser who has converted his business from appraising to appraisal management since the regulation went into effect. “If the appraiser didn’t get close to that price, (he or she) runs the risk of losing out on the commission because the mortgage broker could shop around for another appraisal if he didn’t like the first one.”

But appraisers say the regulation has cost them more time and money.

“What it did, which was an unintended consequence, was completely destroy client relationships,” said Beard, who owns Appraisal Management Group. “Appraisers can no longer get business based on reputation, and it’s a bitter pill for those of us who have been in the industry to swallow.”

Mark Hepner, principal with Portland Residential Appraisals, has been in the appraisal business for 35 years. Since the HVCC was first implemented he hasn’t spoken to one client, and he has known some for 20 years. Now Hepner has to work with appraisal management companies to get business.

“These management companies don’t enhance the quality of the appraisals or the quality of the process,” he said. “Their whole business is taking a cut of the appraisal fee.”

Hepner said his appraisers formerly made $450 per appraisal. Now that they work with management companies, they make between $350 and $400 per appraisal, he noted.

But Hepner is hopeful that will change because the federal government has included a clause in the regulation stating that an appraiser should be paid a “reasonable and customary fee.” No specific numbers are listed, however.

“We get less business because we can’t go off of our reputation and we make less money when we do get business,” he said. “And on top of it all, the quality of the appraisals is down because these management companies don’t hire appraisers off reputation, but rather who’s closest and who’s next in line.”

The regulation also is impacting home buyers.

Nick Krautter, principal broker with the central Portland office of Keller Williams, said home buyers now must pay more for the appraisals.

“It’s a big lose for everyone,” Krautter said. “It’s added more rules, which has translated into more time and more costs for my clients.”

Krautter said appraisals also now lack consistency because the regulation makes it difficult for the appraiser to get additional information on the property from the mortgage broker or the real estate agent. He cited one example in which a house had two appraisals: one was 7 percent lower than the asking price, and the other was 4 percent higher.

“The only difference was I got to talk to the second appraiser and let him know about some of the additions to the house that he couldn’t see,” Krautter said. “HVCC makes it hard to have those types of discussions and can really hurt an appraisal.”

But Jeff O’Brien, chief appraiser with O’Brien Appraisal Group, said the HVCC has at least one big benefit.

“It’s definitely been hard to adjust to, but it has made the process more honest,” said O’Brien, an appraiser for 18 years before shifting into the appraisal management business. “Appraisers can still get the information they need; they just have to turn to different sources.”

Beard agreed that the transition has been difficult. He also doesn’t expect the situation to change.

“There’s really no going back,” Beard said. “We tried to be vocal about it, but this is what the government wants.”