With home foreclosures and short sales dotting every Chicago-area neighborhood and suburb, homeowners who are paying their mortgages on time are scratching their heads and wondering what their house really is worth.

Home sellers are asking: “Why are real estate appraisers using toxic resale data from foreclosures and short sales to evaluate the current market value of the well-maintained, nicely renovated owner-occupied home with a full seller warranty?”

Experts trace the Catch-22 issue to the Home Valuation Code of Conduct (HVCC), which became status quo for real estate appraisers and lenders when enacted in May of 2009.

HVCC is a “guideline” for banks that sell their mortgages to Fannie Mae or Freddie Mac ¬— two of the nation’s largest mortgage finance companies. Beginning in May of 2009, Fannie and Freddie no longer purchased loans that did not comply with the new HVCC guidelines, although they are not law and have never been approved by Congress.

“This new home valuation code became the silent basis on which a powerful wave of faulty and inaccurate appraisals began flooding the real estate market, causing a virtual maelstrom in the industry,” noted former appraiser Sara Benson, broker and president of Chicago-based Benson Stanley Realty said.

Experts say HVCC has had a major negative impact on the real estate industry and has served to encourage substantial erosion of real estate values with severe consequences to both buyers and sellers.

When President Barack Obama signed the Dodd-Frank Act late last month to reform the financial markets, Realtors and home builders from coast to coast cheered because the new legislation schedules the elimination of the vastly unfair home-valuation code within 90 days, experts say.

It will be replaced by new set of “appraisal independence standards” to be created by the Federal Housing Finance Agency by the end of September 2010 that will greatly improve the accurate appraisal of both new and used homes.

“The good news is nothing in the new standards will prohibit a person with an interest in the transaction from asking the appraiser to consider additional information, provide further detail or correct errors in the appraisal,” Benson said.

Home builders nationwide are eagerly awaiting the coming revamp in home appraisal information because they are now identified in the new standards as important sources of data for appraisers, and new-home sales are acceptable as comparable properties when other sources of data are not available.

Fannie Mae has also directed lenders to ensure that appraisers are analyzing listings, contract sales, closed or settled sales and the most recent and similar sales available. Contract offerings and current listings can now be used as supporting data if appropriate.

A recent nationwide study of more than 100 real estate agents and brokers charged that under current HVCC guidelines the appraisal business hit a new low for lack of quality and accuracy.

Realtors in Las Vegas noted that the city has had stable home prices for the past year, and this stability has been documented in trade publications and MLS statistics. However, throughout 2009 and 2010, “lowball values” were routinely handed out by appraisers, said Tim Kuptz, broker/owner of REMAX Advantage in Las Vegas. In 12 straight deals, Kuptz’ partner witnessed appraised values coming in below contract prices—an average of more than 8 percent lower, and these were properties with multiple offers.

The primary aim of the HVCC guidelines was a good one—to protect consumers against inflated home appraisals. A secondary goal was to insulate appraisers from pressure to hit a predetermined number by eliminating the relationships between mortgage brokers or real estate agents and appraisers.

However, to achieve that goal, a third party middleman was injected into the appraisal process. This intermediary, called appraisal management companies, demanded all appraisers conducting business with Fannie Mae or Freddie Mac hand over their client lists—and take a cut in pay—while management fees rose 50 percent.

As a result, hundreds of veteran appraisers left the profession, and the end result was appraisals were being prepared by newly licensed out-of-area personnel, who were unqualified and often incompetent.