Home Valuation Code Of Conduct: Investors Be Ready
May 1, 2009, Writen by: Chris Anderson, Ph.D
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Today marks a major change in the lending landscape and the way loans are sold to Fannie Mae & Freddie Mac…. Specifically, how they are appraised.
If you have not heard of Home Valuation Code Of Conduct (HVCC),just ask your favorite mortgage broker about it and more than likely their response will be something like:
&$#@%^&%$#^%$#@#$%^
(sorry, but can print what they really will blast you with)
In short, this change is designed to fix the evils of the past.
As always, there are good and bad sides to every change. We will explore the good, bad and ugly of this new approach but first, let’s synopsize what it is about.
WHAT IS HVCC (Short Story)
So what does the code say? Basically, it’s that the people responsible for originating mortgages can have nothing to do with the appraisal process.
In addition, the code also:
* Prohibits lenders and third parties from influencing or attempting to influence appraisals.
* Requires lenders to ensure that borrowers get a free copy of appraisal reports at least three business days before closing.
* Allows lenders to have in-house appraisers, so long as they’re completely independent of sales staff and their compensation does not depend on their estimates or on loan closings.
* Requires lenders to test a randomly selected 10 percent (or other statistically significant percentage) of appraisals and report any problems to Fannie Mae or Freddie Mac, which may force lenders to buy loans back from them.
* Requires lenders to report appraisal misconduct to applicable state agencies.
You can download a copy of the HVCC at: https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/hvcc.pdf
WHY IS HVCC GOOD?
Let’s face it, the appraisal business has been a bit “rigged” over the last several years.
In short, only appraisers that could “get the deal done” were used on a repeated basis by mortgage brokers, realtors, and or builders. It only makes sense that this is the way the system worked. If you were a realtor, or even if you were a new home buyer, the last thing that you want is for your appraisal to come up short and the deal fall apart.
Since appraisals are somewhat subjective, the appraisers that always got called were those where the subjectivity worked out in favor of the deal.
However, many appraisers felt very pressured to make the deal work….. their future business counted on everybody walking away happy. Of course we are now seeing some of the consequences of that type of approach with our current housing and mortgage crisis.
WHY IS HVCC BAD?
Because now your purchase or sale is a crap shoot.
Why?
Simply because appraisers will be pulled out of a “blind pool”. From my personal experience, only about 20% of appraisers are good at their profession (you know, the ole 80/20 rule).
So you now have an 80% chance of a mediocre appraiser being assigned to your appraisal. Are they really capable of determining the value? I am skeptical.
In addition, most the incentives for the appraisers are now set up to appraise low….. The safe play is to come in BELOW what you may be thinking is actual value.
CONSEQUENCES
HVCC will be implemented May 1, 2009. Many people believe, myself included, that this is going to severely disrupt the home seller market, and investor market, for a period.
Everybody’s major hope is that soon, tweaks will be made into something that is workable for all in the industry.
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On the Short Story: When were lenders able to influence appraisers? When were clients not getting copies of their appraisals for free and before closing? When were appraisals not reviewed? When did lenders not report misconduct of Appraisers? When was compensation based on Values and Closed Loans? This sounds more like a Lender problem then an Appraiser problem? It is now going to be a consumer problem by not having experienced Appraisers able to know the market and tell the story. Market Values can be more then a number and Appraised Value can be more then formula. It takes experienced Appraisers who understand Market Shift, Neighborhood Values, and Market Trends in Local Markets as well as standard appraisal practices to determine Fair Market Value. In Rochester, New York and our surrounding Towns homes in great condition, priced competitively and in good locations and properly marketed still sell quickly. We never had any real run away housing prices. Our seasoned Appraisers know the Market. Why take business away from them? Once again didn’t the banks push the buck to place more loans? I think they came first not the Appraisers?
I’m an appraiser, and I know that a properly performed appraisal is accurate within a couple percent. I know this, but I understand those who are skeptical. To me that’s the first challenge in the bigger question. If you were able to assume with certainty that properly performed appraisals are accurate, how would that affect your view on what should be done?
I have been leasing a home for nearly one year now and signed a lease agreement along with a option to purchase agreement with the intention of buying. Well, now I am in the process of getting an FHA loan. I love the home, but have had much difficulty with the builder and the broker involved with the deal. I submitted $6,000 option money and $200 earnest money before moving in last march. I am told by the broker and realtor that the $6,000 would be lost if I did not buy the house. However, if the appraisal did not come back at the amount we agreed to for the purchase, then the builder would have to come to that amount or I could opt out with supposedly all option and earnest money returned.
The appraisal has been ordered as we are nearing a close on the loan. However, I am very skeptical of the “good ole boy” system taking affect now. I have found out that the broker faxed the appraiser the purchase agreement, which obviously includes the purchase agreement price, etc. I have talked to the appraiser and he even asked how much my monthly rent is.
I do not trust the process, especially the builder and broker. It seems there is attempted corroboration with the appraiser going on. All I want is a fair market appraisal of the property, nothing more nothing less! What are my rights?