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.

The National Association of Realtors and the National Association of Home Builders have conducted member surveys that found that the appraisal system often produces valuations below the agreed-upon price in sales contracts - causing delays and disputes among sellers and buyers - and that management company appraisers use inappropriate foreclosed and distressed-sale transactions as "comparables" in their valuations of houses in non-distressed situations.

Mortgage brokers complain that the code has cut them out of their traditional role of choosing qualified local appraisers, and has forced some loan applicants to pay for multiple appraisals. When applicants are quoted an unacceptable rate or fees by one lender, other lenders often won't accept the original appraisal. In other words, appraisals under the code no longer are "portable" as they had been traditionally, when brokers could send consumers' application files to multiple lenders using a single appraisal.

The net effect, said Roy DeLoach, executive vice president and CEO of the National Association of Mortgage Brokers, "is that we now have a dysfunctional system that's holding back the housing recovery. Incompetent, low appraisals not only hurt individual sales, but depress property values in entire neighborhoods unfairly."

The amendment that would terminate the Fannie-Freddie code still has a long way to go before becoming reality. It was co-sponsored by Reps. Gary Miller, R-Calif., and Travis Childers, D-Miss., and is an outgrowth of an earlier bill that would have clamped an immediate 18-month moratorium on the code. That larger legislative proposal currently has 118 co-sponsors and could still move in the House independently.

Legislation creating the new Consumer Financial Protection Agency itself faces an uphill battle. Though the House Financial Services Committee bill has the strong endorsement of President Obama, and could pass the full House as part of a larger regulatory reform package, its future is uncertain in the Senate, where big banks and mortgage companies are massing forces against it.

What happens if the consumer agency bill falters? DeLoach said housing groups will still lobby for the 18-month moratorium proposal. Equally important, however, he added, "a major committee of Congress has now sent a clear message" to Fannie and Freddie: "Your appraisal code is not acceptable."

• Write to Ken Harney at P.O. Box 15281, Chevy Chase, MD 20815 or via e-mail at kenharney@earthlink.net.

© 2009, Washington Post Writers Group

Superfreaky idea pits pimps vs. real estate agents

Ex-pimp turned preacher gives his take on Freakonomics theory

The provocateurs who made economics cool with the best-selling book Freakonomics are back with a sequel, Super-Freakonomics, that is causing quite a stir in global warming circles for its flip handling of a serious subject.

But nobody reads this space for global warming news. Indeed, I'm more interested in causing a stir with another of the book's flip assertions: that a pimp's services are more valuable than a real estate agent.

The authors, University of Chicago "rogue economist" Steven D. Levitt and journalist Stephen J. Dubner, must think they've hit pay dirt by getting the global warmers mad at them, and they probably have. Just wait, though, until the real estate agents catch up to them.

In arriving at their conclusion that a pimp provides more value than a real estate agent, the authors analyzed two completely unrelated studies.

The first, using data compiled by former University of Chicago sociologist Sudhir Venkatesh, found that prostitutes working solo in Chicago's West Pullman and Roseland neighborhoods earn $325 a week while performing an average of 7.8 tricks, while prostitutes with a pimp working the same area earn $410 a week while doing only 6.2 tricks.

In addition, a prostitute who works with a pimp is "less likely to be beaten up by a customer or forced into giving freebies to gang members," the book states.

Even after paying a 25 percent commission, the authors conclude, prostitutes with a pimp "come out ahead on just about every front."

They contrast this with a study out of Madison, Wis., that concluded that houses sold by owners over the Internet fetched about the same price as those sold by real estate agents.

Why even compare pimps to real estate agents?

"A Realtor and a pimp perform the same primary service: marketing your product to potential customers," Levitt and Dubner explain.

Brushing off the fact that real estate agents actually do the sales work for the property owner, the authors conclude that "once you consider the value you get for each of these two agents, it seems clear that a pimp's services are considerably more valuable than a Realtor's."

If we momentarily set aside the gaping holes in their conclusion, we can probably agree that our own opinions of this pimp vs. real estate agent question rest largely on our own most recent experience buying and selling a home.

On the other hand, it's much less likely that you've ever dealt with a pimp. That's why I sought consultation Wednesday with Chicago's most famous former pimp turned preacher, Bishop Magic Don Juan.

The Bishop, who honed his craft on the West Side before turning to the Lord, moved 10 years ago to Hollywood, where he now practices his own unique form of ministry among the hip-hop stars -- Snoop Dogg being his most devoted disciple.

But the Bishop told me Chicago is still very much on his mind, and that he even told U.S. Congressman Danny K. Davis last week he'd love to find some role in his administration if Davis becomes the new Cook County Board president. I think I first ran across the Bishop when he ran for 29th Ward alderman to replace Davis in 1991 under his given name, Donald Campbell.

"I hate to sit in Hollywood and hear what is going on back in my hometown," the Bishop told me by telephone, although assuring me he'll be here in person Friday night for a Players Ball celebrating the birthday of a fellow he described as the No. 1 pimp in Chicago. The Bishop's own annual Players Ball is slated for Dec. 5, and he says I'm invited. The wife will love that.

The Bishop still hits the streets "suited and booted," as he calls it, in outfits that would have made Superfly blush. He says being counselor to the stars pays even better than pimping, and certainly better than the storefront church he later ran on Madison Street.

"God has provided," he says, assuring me there are still a Rolls and a Cadillac outside his Hollywood apartment -- one green, the other gold. ("Green for the money, gold for the honey," he explains.)

So what does the Bishop think about the superfreaky hypothesis advanced by the SuperFreakonomics guys: that a pimp provides more value than a real estate agent?

"That is a true statement," he said enthusiastically.

"Pimps are the best thing for the economy," he continued, not quite tracking with their concept. "Ask any retailer in the world. Don't nobody spend money like a pimp.

"With a pimp, you can open and close on every corner when you get ready. Real estate can't say that. And the girl works every day. What would you rather do -- get your percentage every quarter or every day?"

Somebody should take the Freakonomics guys to a Players Ball.

Housing risks still lurk even as buyers return

By Al Yoon and Nick Carey

RIVERSIDE, California (Reuters) - On the surface, a glimmer of confidence is returning to the battered U.S. housing market, after more than three years of gut-wrenching defaults, price slumps and foreclosures.

But investors and homeowners in California, the most populous U.S. state and a benchmark for housing across the country, are bracing for another fall as emergency government support measures fall short or expire.

"All that has been achieved is to put off the real pain until later on," said Mark Jacques, a mortgage broker in Corona Del Mar, California. "I'm hunkering down for the storm."

California led the United States when housing prices soared early this decade, spurred by an array of public policy incentives to encourage home ownership. The boom fueled a frenzy of lending and spending that drove the U.S. economy.

But California proved to be the epicenter of reckless lending that pushed housing throughout most of the United States over a cliff in 2007, triggering a credit crisis that plunged the world economy into recession.

The sobering view now from ground zero of the U.S. property market underscores the problems faced by President Barack Obama as he tries to fix the U.S. economy.

Washington is trying to stem rising numbers of homeowners who cannot afford their mortgages as job losses mount.

Housing prices have fallen to levels not seen since 2003. But even investors pouring millions of dollars back into real estate say it may take up to four more years for California's housing market to settle.

The reasons why -- rising foreclosures, joblessness and tight credit -- are not unique to the state and may have already slowed a recent recovery in places like Florida.

A first test of the U.S. housing rebound could come with the scheduled November 30 expiry of an $8,000 tax credit for first-time buyers.

The plan has resulted in 357,000 home sales so far in 2009, out of a total 3.88 million, according to a survey of realtors by research firm Campbell Communications Inc.

Ending the credit will likely cause a drop-off in buyers, or a "false peak" of the budding housing recovery, according to John Burns Real Estate Consulting in Irvine, California.

In a sign of concern in Washington that the housing market cannot yet stand on its own feet, administration officials say they are considering an extension of the credit.

Helped by government measures and a sense that the worst of the price slump is over, U.S. home prices have risen nearly 4 percent from their low point in April. But the bounce was preceded by a 33 percent slide since the peak in July 2006.

BIDDING WARS, WEAK OUTLOOK

The nascent housing recovery has combined with stronger data in other sectors to suggest the U.S. recession is over. This has helped thaw credit markets that are the lifeblood of the economy.

Bidding wars are breaking out in some areas. Sales are now routinely above asking prices in California, from wealthy Orange County towns like Irvine to harder-hit San Bernardino County in the high desert east of Los Angeles.

"The number of people around with cash right now is unbelievable," said Janice Konkol of FirstTeam Real Estate in Irvine, showing a foreclosed home on the market for nearly $650,000. Business cards littering the kitchen counter told of frequent visits by realtors. The house sold for $890,000 in mid-2007 -- and when new in 2002 for $461,000.

But the underlying picture remains weak.

Efforts by the government and by banks to help struggling homeowners cut payments and stay in their homes are outpaced by mortgages going bad. The mortgage-modification programs risk being swamped by rising unemployment.

"Whether we put a dent in it is hard to say," said JC Ferebee, manager of Wells Fargo & Co.'s team at a mass modification event in Los Angeles.

The event drew 50,000 people over five days, hoping for mortgage-reduction deals to help keep them in their homes, according to the organizers, the Neighborhood Assistance Corp. of America. It presses banks to avoid foreclosures.

"When you look at the whole culture right now and the economy with the jobs situation ... it's a domino effect," said Ferebee.

The U.S. jobless rate in September hit a 26-year high of 9.8 percent and is likely to head into the double-digit levels already suffered in California.

The jobless rate is usually considered to be a lagging economic indicator because employers are slow to hire after a recession as they wait to be sure a recovery is for real.

Economists fear that a protracted and high unemployment rate this time will deter Americans from spending more again on houses and goods, raising the prospect of a slow recovery.

"If the economy continues to lose jobs, demand by consumers becomes inhibited even if you have very low (interest) rates," said Mohamed El-Erian, chief executive of Pacific Investment Management Co., the world's largest bond fund manager.

Aware of the risks posed by unemployment to the economy, the Obama administration is considering extending unemployment benefits as well as the first-time homebuyer tax credit.

JOBS GONE, BUSINESSES IDLE, HOMES LOST

The swift downturn in California's economy and the ensuing wave of job losses cost Sue and Nabil Boctor their house.

They own Sue's Cafe, a small diner near downtown Riverside, California, a thriving business center just 15 months ago.

"This place was crowded every day," Sue, 59, said, sitting in her deserted cafe, scanning a newspaper for apartments to rent. "We had three people helping to deliver food and even then we couldn't keep up."

Many of the one- and two-story office buildings nearby carry large "for lease" banners and the parking lots are all but empty. A local shopping mall stands more than half vacant, its liquor store the only one still doing a roaring trade.

Until recently, the local construction industry strained to meet demand for new homes. Warehouses were full of consumer goods arriving from Asia via U.S. West Coast ports to meet the seemingly insatiable appetite of once free-spending Americans.

Most of the Boctors' customers have lost their jobs or their work hours were cut so much that they no longer eat out.

The Boctors' story is not the usual cautionary tale of the housing crisis.

Unlike many borrowers who took out mortgages without having to put any money down and then borrowed further still against the value of their homes, they put down $100,000 and took out a $440,000 mortgage with a stable, fixed rate of interest.

But the sudden collapse of the local economy, and their business along with it, meant they could no longer afford the mortgage payments. Their house, their dream home for their retirement, was due to be auctioned off on October 13.

Nearly 18 percent of working-age Californians were either officially classed as unemployed, working part-time because they could not find full-time work or had given up looking for a job in the second quarter of 2009, according to official data, compared with nearly 14 percent nationally.

"I do think we've come into a new cycle" of defaults, said Ron Faris, president of Ocwen Financial Corp, a servicer of 280,000 subprime mortgages.

He has noted a shift in the causes for debt delinquency from rising loan costs to joblessness.

Standing on his sun-baked driveway in Moreno Valley, a small town 12 miles from Riverside, Nabil Boctor, 65, pointed to four houses on his block that have been foreclosed on and now stand empty.

"The crisis is everywhere and it's growing," he said. "This will take a decade to work itself out and by the time it's over everyone is going to have to feel some pain."

Around the corner, a family was loading a trailer with their belongings, ready to move on.

FORECLOSURE BACKLOG

What banks do now with properties their occupants cannot afford is the biggest unknown factor in the housing market.

Economists fear a repeat of the flood of foreclosure listings that scared all but vulture buyers -- specialized in assets few others want -- and sped the 2008-09 price slump.

More than half of house sales in southern California in late 2008 and early this year involved "distressed" properties, accelerating price drops, according to Thomas Lawler, founder of Lawler Economic & Housing Consulting in Leesburg, Virginia.

In response to the slump, banks slowed foreclosure sales to seek other solutions for homeowners and help shore up prices.

At the same time, the Federal Reserve's emergency slashing of interest rates to near zero has helped encourage buyers to take advantage of the lowest prices in decades and a rush by the Federal Housing Administration, a U.S. agency, to guarantee more loans is also helping would-be home owners find credit.

But the emergency steps by the government and the Fed will be overrun by economic forces, according to many analysts.

"We are far from persuaded by a little summer upturn in a sector that the government had endeavored so mightily to support," Deutsche Bank said in a report last month.

In California's Inland Empire -- a 27,000 square mile (69,900 square kilometers) region made up of Riverside and San Bernardino counties, prices will likely fall 15 percent from June for a peak-to-trough drop of 66 percent, the most for the biggest 10 U.S. metropolitan areas, Deutsche Bank predicted.

Local buyers rely not only the scheduled-to-expire tax credit but almost entirely on funding from the FHA, which in response to rising taxpayer losses may soon tighten access to its credit. One bill would require bigger down-payments.

Furthermore, in a worrying sign for the plans to help struggling homeowners across America, modifying loans -- rather than foreclosing on homes -- often does not work.

Nearly 43 percent of homeowners whose mortgages were modified in the first quarter fell behind on payments within three months, data from the U.S. Office of the Comptroller of Currency shows. For older modifications, the re-default rate is above 50 percent.

Postponed foreclosures have created a backlog that banks may have little alternative but to dump onto the market.

Foreclosures being processed surged nearly 80 percent in the second quarter from a year earlier to nearly 1 million. But completed foreclosures fell nearly 10 percent to 106,007, the OCC says.

Brokers in California bemoan what they say is just a delay in the inevitable pain of people losing their homes and the follow-on boom in sales of cheap properties, something for which there is no shortage of demand today.

Bruce Norris, president of property investment firm The Norris Group, said inventory levels are "completely artificial, completely baloney ... The delinquency rate (in California) has exploded, but inventory levels have gone down. In many of these cases the banks have simply avoided foreclosure."

Amherst Securities, a broker-dealer specializing in residential mortgage-backed securities, calculated a mountain of 7 million U.S. housing units is likely to end up on the market -- equivalent to 135 percent of a normal year's supply.

"It's going to drip on the market," said broker Fred Arnold in Stevenson Ranch, California. "We don't have the state and federal government that will let the natural supply and demand market occur which is pushing the real estate problem into 2012."