Four states are considering legislation that would prohibit or restrict appraisers from using distressed sales, such as those of foreclosed properties, as comparable sales when assessing the value of a home.
The rationale for the bills in Illinois, Nevada, Missouri and Maryland is that the prevalence of foreclosures and short sales — almost four out of 10 sales in the country are distressed — is distorting the markets.
But lenders are worried that excluding these transactions from appraisals will lead to the kind of inflated valuations that contributed to the housing crash four years ago.
"The notion that you are going to excuse foreclosures from the calculation of value means that as much as you would like it to be higher, the value you are assigning the house will be overstated," said Bill Uffelman, the president and chief executive of the Nevada Bankers Association. "It will be contributing to a new bubble."
Even for lenders who are comfortable with appraisals that ignore distressed sales near their collateral, selling the resulting loans into the secondary market could be a problem.
"There is the very, very real possibility that if one of these bills were enacted into law that Fannie Mae, Freddie Mac and the FHA would stop accepting appraisals from those states," said Scott Dibiasio, the manager of state and industry affairs at the Appraisal Institute, a trade group.
The Federal Housing Finance Agency, the conservator for Fannie and Freddie, and the Department of Housing and Urban Development, the parent agency for the Federal Housing Administration, didn't return late calls Friday by press time.
At the very least, lenders would have to start pricing in uncertainties in states that adopt legislation restricting appraisals from taking into account distressed properties, Uffelman said.
"What will happen is that in effect we will have a foggy appraisal," he said, "so the interest rate will be higher."
Appraisers are worried the bills would put them into a legal Catch-22 in which they would have to violate federal standards in order to comply with state ones.
