The mortgage industry is a battered machine right now, and brokers and appraisers say another massive wrench is about to be thrown in the gears – unless they can derail it with a lawsuit.

The National Association of Mortgage Brokers is trying to rally brokers and appraisers to fight new guidelines they say will threaten small business. The Housing Valuation Code of Conduct, which was revised in late 2008 and will take effect May 1, has been met with widespread dismay from an already-reeling industry.

Worse, some allege the guidelines are the result of nothing more than political favoritism, and will do nothing to stop the abuses that helped create the current housing crisis.

“It’s all politics. Everybody’s posturing. In the meantime, while they’re playing these games, we have a lot of suffering going on,” said Marc Savitt, president of NAMB, which is raising money to bring legal action against the arbiters of the new rules: The Federal Housing Finance Agency – regulator to Fannie Mae and Freddie Mac – and New York Attorney General Andrew Cuomo.

Savitt, like many in the profession, rattles off reasons why the new guidelines will cripple small businesses and fail to protect consumers, but he joins others in pointing out the requirements aid Cuomo’s political donors.

The code, for example, will drive most appraisal business to appraisal management companies – such as Ed Davidson, former owner of appraisal management company AMCO and a major contributor to Cuomo campaigns. Rumors of such favoritism have been making the rounds on business and industry blogs since last spring.

“I initially believed [the guidelines] were well-intended,” Savitt said. “I no longer believe that.”

Creating Distance

The HVCC, or new set of guidelines, is intended to prevent a problem Cuomo reportedly uncovered in an investigation of Washington Mutual and First American eAppraiseIT, which has its office in Danvers.

Apparently, eAppraisIT inflated appraisal values at the request of Washington Mutual, which got borrowers into loans that eventually proved to be worth more than their houses warranted.

The HVCC tries to prevent that collusion by creating distance between the mortgage broker and appraiser. It requires a go-between; now the mortgage broker orders the appraisal through an appraisal management company, which in turn deals directly with appraisers.

Joseph Ferraro, president of Branford, Conn.-based brokerage Sterling Financial Group, pointed out that although this investigation found problems with a lender and an appraiser, it puts harsher requirements on mortgage brokers – that makes no sense, he said. The code tried to fix the problem by removing power from brokers, but instead merely moved that power over to appraisal management companies.

On a practical level, the code will slow up the process for customers, Ferraro said, as he can’t have any interaction with appraisers, even if it’s merely trying to speed up the process.

The Other Shoe

Then there’s the extra cost.

Those management companies will lop off a significant cut of the cost of the appraisal, meaning appraisers will do the same work for less money, said James Kasparian of Burlington-based Kasparian Appraisals and Consulting.

Not only that, but appraisers get much of their business from longstanding business relationships with brokers. With so much power now in the hands of management companies, appraisers don’t know where their business is coming from.

“Everyone’s kind of panicking,” he said.

Savitt said mortgage brokers and appraisers have donated to aid NAMB’s efforts to stop the oncoming change. But Steve Sousa, executive vice president of the Massachusetts Board of Real Estate Appraisers, says these guidelines are tough to fight. If they were in the form of direct regulation, there would be a back-and-forth between parties, with a comment period and the opportunity for amendments.

But that’s just it: these aren’t new regulations, exactly, even though they may as well be. Fannie Mae and Freddie Mac won’t buy any loans that aren’t made under these guidelines, cutting off access to the secondary market for anyone who makes loans outside of these rules, Sousa said.

“It’s hard to challenge it in Congress or by saying ‘amend this law’ … Because it’s a guideline change,” he said.

Savitt’s group claims the new guidelines are effectively “de facto regulations” for brokers and appraisers, and that the FHFA did not follow the protocol for setting up new regulations, including allowing a specific time for comment and amendments.

Sousa believes Fannie Mae and Freddie Mac passed the code quickly and quietly because Cuomo was threatening a lawsuit over Washington Mutual and eAppraiseIT. David Feldman, head of eAppraiseIT in Danvers, said he couldn’t comment on the company’s involvement in an investigation because of ongoing litigation.

Sousa said his organization welcomes “a good portion” of the new code. Because it’s true: brokers sometimes did influence appraisers. But appraisal management companies can easily step in and exert the same influence, he said.

What’s more, appraisal management companies often pressure appraisers for an extremely quick turnaround time, meaning the appraiser could rush the job and turn out an inferior product.

It’s all piling on more pain, Sousa said, on an already harried industry.

The ranks of appraisers are thinning: their Massachusetts numbers have gone down 21 percent in the past three years, and the biggest decrease was from 3,800 appraisers in February 2008 to 3,200 this month. With new troubles on the horizon, that trend isn’t likely to turn around soon.

“Everybody’s just fearing the worst at this point,” he said.