The Misconduct of the Home Valuation Code of Conduct (HVCC) - Detroit

HVCC, as currently written, will be kicking a housing market that's already on its knees.

 DETROIT, MI - Despite the efforts of the real estate and lending industries, the Home Valuation Code of Conduct went into effect May 1, 2009, bringing a dramatic change to the home financing process.

HVCC is the result of a 2007 lawsuit brought against an appraisal division of First American Corp. by the New York Attorney General, Andrew Cuomo, for allegedly inflating appraisal values on an estimated 260,000 WAMU mortgages.

So now, in typical government fashion, we go from one extreme to the other - unmonitored appraisal inflation replaced with bureaucratic appraisal deflation.

The intent of HVCC is to prevent loan originators from having undue influence over appraisers on the valuation of homes and prevent inflated appraisals.

Appraisals for mortgages on 1-4 family homes to be sold to FNMA or FHLMC, will no longer allowed to be directly ordered by loan originators.  They must be ordered through Appraisal Management Companies (AMC) that act as middlemen between appraisers and loan originators.  (Currently HUD's FHA loans are not subject to HVCC.  Loan originators can still order their own appraisals from trusted appraisers for FHA loans.)

Sounds great in theory, but the reality is far from perfect.

I had lunch with several of my mortgage competitors this past week.  The main topic ended up being the HVCC and what it'll mean to the process of financing a home.  The consensus was that there are going to be a lot of unhappy people - homeowners, homebuyers, sellers, real estate agents, loan originators and more. 

Was there a problem with inflated appraisals?

Yes, but HVCC in its current version, creates more problems than it solves.  Underwriting departments at most lenders were already using advanced computer programs to address the problem of inflated appraisals.  Appraisers found to be providing questionable values and work, were banned by that lender.

Why is the industry so up in arms over HVCC?  Well, let's look at how the system is supposed to work: 

• Loan originator orders appraisal from AMC (usually via internet)


• Payment must be made when the order is placed to avoid appraisers being forced to bring in a specific value in order to get paid.


• AMC randomly assigns the appraisal order to one of the appraisers on its list of approved appraisers


• Appraiser is typically required to complete & deliver the appraisal within 48 hours

Sound easy doesn't it!  So what's the problem? 

• There are no requirements concerning the proximity of an appraiser to a property or their knowledge of an area. I know of a recent occurrence where an appraiser from Grand Rapids was assigned to appraise a home in Livonia. Not surprisingly, the value came in significantly under what local real estate agents estimated it to be.


• The cost of appraisals has gone up. Our appraisers typically charged $300-$350, now the AMC's charge $450 or more.


• Instead of an appraiser getting their full $300, AMC's only pay them $175-$250 of the $450 charged. So, appraisers will have to do more appraisals to earn the same amount they have in the past. This will lead to shoddy work.


• The AMC doesn't care if data for the appraisal is difficult to find and would normally take longer to provide an accurate value. They want them ALL back in 48 hours, failure to do so could exclude the appraiser from their list. Again, this will lead to shoddy work. Many high end homes sold in the past recorded the sales price as $1 in the MLS. Normally, an appraiser would go to county records to research the actual sales price. The 48 hour turn time requirement will now lead to appraisers just ignoring these sales, which could negatively impact the appraised value.


• There is very little anyone can do to challenge a low valuation at this time. Oh sure, there are forms you can fill out to do so, but the real chances of an override occurring are slim. The only option then is changing lenders and paying for another appraisal, while still hoping for a better value. This will all have to be paid by borrowers and mean longer application timelines.


• Each lender has their own approved AMC. There is nothing in HVCC requiring lenders to honor each other's appraisals, so switching lenders could mean paying for another appraisal.


• I haven't seen anything in writing about how AMC's will monitor and rate appraisers for the quality of their work. Will it be any surprise that appraisers will just use the first three comparables that pop up on their computer searches? What incentive do they have to put more time into making sure an appraisal reflects the best and most accurate value possible?

These are not the type of challenges you want to hear when real estate values are dropping, especially for those trying to refinance.

Should we blame the appraisers when their valuations start affecting transactions?  I don't think we should.  None of the appraisers I know have anything good to say about HVCC.  Many of them have spent years building their businesses by establishing relationships through providing great service.  Now those relationships are all being taken away from them.  They're also not happy about the time constraints the AMC's are placing on them.  HVCC and the AMC's treat appraisers like they're a commodity and 100% the same.  It'll create a race to the bottom and reward appraisers who work the cheapest and fastest at the expense of quality.

I'm going on record here advising real estate agents to pull their own comparables and hand them to the appraiser when you meet them at a property.  Maybe even go one step further and do a mini Broker Price Opinion!  Otherwise you're leaving the fate of your transaction in the hands of an appraiser who really may not care if your deal closes or not.

If you're a homeowner looking to refinance, you may want to get back in contact with the real estate agent that sold you your home and have them do what I suggested for a purchase transaction in the paragraph above.

By the way, anyone thinking that going to a bank or a certain lender will avoid the problem, is seriously mistaken.  Everyone in the industry will be facing the same problems.  Homeowners trying to refinance won't be able to threaten to go to their banks to avoid the problem.  Real estate agents won't be able to blame loan originators if a sales price is not met.  It's a new reality we'll all have to learn to deal with.

A BETTER SOLUTION?

Obviously, there was a problem with inflated appraisals.  HVCC is a step in the right direction to address the problem, but several logical modifications can be made to improve it.   

• Create a nationwide, central database where all appraisers have to register, so "bad eggs" can be identified by all. The federal government required it for loan originators due to fraud issues, so why not appraisers? The same mechanism can also be used.


• Require any and all owners of AMC's to pass a background check. Currently, an appraiser, lender or real estate agent could have their license revoked, but still open an AMC.


• Create a national system to randomly review the work of appraisers and address complaints. HVCC as it is, leaves this to the AMC's themselves. Self-regulation really worked in the banking industry, didn't it?


• Require all lenders to use independent AMC's. Banks are currently allowed to own AMC's, which makes absolutely no sense - unless you're a politician getting bribed by the banking industry.


• Standardize the AMC's appraiser approval process and require that they all accept each other's appraisals.


• Create penalties for AMC's that pressure appraisers to work on unrealistic deadlines to stay on their approved lists. The 48 hours that most AMC's require is foolhardy. A week is more realistic. Pressuring appraisers to rush their work is really no different than pressuring them to inflate values.


• There should be geographic proximity requirements for assigning appraisals. Is it reasonable to expect an appraiser desperate for work to turn down an order in an area they don't know?


• Create a standardized system of review, so shoddy appraisal reports can be properly addressed. Since any review system takes time, which could cause a transaction to fall apart, the review system should provide a borrower the option of ordering and paying for a 2^nd appraisal, but then require a full refund of the 1^st appraisal if it's found to be suspect. 

 

The improvements suggested above won't create a perfect solution as that's impossible in the real world.  They could dramatically improve a seriously flawed HVCC though.

Please keep in mind that we're all in this together, both borrowers and industry professionals.  We have a government that's giving out hundreds of billions in bailout relief to those at the top that caused the housing crisis - while seeming to make everything harder for the average homeowner.  We have to stick together to find our way through this new challenge. 

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Drew Sygit is President of The Lending Edge and holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor.  He's spoken for HUD, written articles for the Financial Planners Association of Michigan and Oakland Real Estate Investors Association, presented for the Michigan Associations of CPA's, has written numerous industry articles, and is a mortgage industry advocate for loan originator licensing and consumer education.  If looking for a mortgage in Michigan or a speaker for your organization, he can be reached at 248-356-3739 or dsygit@TheLendingEdge.com.  Follow his blog at: http://drewsmortgagenews.blogspot.com