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Lawmakers Want to Exclude Foreclosures from Home Appraisals

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Concerned that empty or foreclosed houses in your neighborhood may be dragging down the value of your own home? Four state legislatures are considering laws barring appraisers from factoring in distressed sales in the area—things like foreclosures and short sales—when determining a property’s value.

The bills have been introduced in Nevada, Illinois, Missouri and Maryland. Some lawmakers see the measures as ways to limit fallout from the foreclosure mess that resulted from the housing bubble burst four years ago.

“(A)n appraiser shall not utilize the foreclosure price as a comparable property when developing an appraisal,” says Missouri House Bill 292, introduced by Rep. Vicki Schneider, a Republican and a real estate developer from suburban St. Louis. The four legislators who introduced the bills did not return calls seeking comment.

Opponents see the proposals as a recipe for chaos, arguing that the exclusion of a recently foreclosed upon home as an appraisal criterion would be akin to ignoring the gaping hole left by a tornado that has ripped off a house’s garage.

[Related Story: FHA’s Foreclosure Backlog an All-Time High]

“Mandating that they exclude foreclosures and short sales—when that’s all there is in the marketplace—then what do they base their appraisal on?” says Bill Uffelman, president and CEO of the Nevada Bankers Association.

State bills limiting what appraisers can consider also may put them in conflict with federal laws and their own professional codes of ethics, Uffelman points out. The Uniform Standards of Professional Appraisal Practice, which apply to loans sold to or insured by Freddie Mac, Fannie Mae or the FHA, requires appraisers to compare houses to those nearby in order to determine value.

If all houses sold in the last year near a house being appraised were either foreclosures or short sales, as Uffelman says is often the case in cities like Las Vegas, then appraisers may not be able to find a true house value that qualifies for a loan backed by the FHA or other federal entities.

“Yeah, there’s frustration in the marketplace,” Uffelman says. “But if it were to pass, it puts the appraisers between a rock and a hard place.”

Image: Taber Andrew Bain, via Flickr.com

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