Never before has a change in the housing industry impacted so many participants and caused unsettling debate. The Home Valuation Code of Conduct ( HVCC), is the result of a joint agreement between the Agencies’ Fannie Mae, Freddie Mac, Federal Housing Finance Agency, and New York state attorney general Andrew Cuomo, to improve the quality and accuracy of the appraisal process. While the intent was great - protections for homebuyers, mortgage investors and the housing market – honest industry participants and homeowners are being punished in an effort to thwart the efforts of the bad apples that created our current housing challenges.
History of HVCC
In a 2008 announcement, Freddie Mac and Fannie Mae stated they would no longer purchase mortgages from sellers that do not adopt the HVCC effective May 1, 2009. Since FannieMae and Freddie Mac purchase 85% of all mortgages being originated today, this is a significant policy that changed property valuation processes for almost all lenders.
Fans of HVCC
Appraisal Management Companies (AMC) have much to gain from this change in valuation process. The AMCs were not widely used by lenders before the HVCC because they added additional cost and processing delays. Now that many lenders are choosing to outsource the compliance to HVCC, new AMCs are being formed, and existing AMCs are busy.
Underwriters (who thought it was a good idea to restrict communication between commissioned sales people and the valuation process) are now realizing their worst fears: many appraisers do not understand how a lender perceives collateral risk. HVCC has actually increased the number of lender phone calls back to the appraiser asking for clarification on items found on the report.
I was not sure if I should put Appraisers in the fan or critic group. In theory, they have the most to gain because they are no longer being “coerced” into supporting phony values. However, I have yet to interview an appraiser that thinks the HVCC was a good idea. Communication between originator and appraiser is now restricted, making compliance with HVCC difficult at best. The Appraisal Institute has published an article called HVCC Myths & Realities . This document summarizes the formal statement issued by the appraisal industry in support of the code.
Lender operational staff responsible for Quality Control love HVCC. Most quality control personnel sit behind a desk with limited knowledge (and some stereotypes) about how loans are originated. While Quality Control is important, the way it is actually carried out has proven ineffective at preventing this housing crisis (subject matter for another article).
Critics of HVCC
Realtors are having difficulty selling homes under the new code and are seeking a 18 month moratorium to get us thru the worst of the housing crists. In article written by Inman News, the National Associaton of Realtors cheif economist Lawrence Yun says "faulty valuations" prevented many home buyers from securing mortgages in May, citing the HVCC as one of the appraisal issues that are stifling home sales.
Homebuilders are having some difficulty with HVCC. The National Association of Home Builders says the use of foreclosures and short sales as comparable properties for valuation purposes is inappropriate and has put a damper on new-home sales. Their argument is that a homebuyer that wants a new build is not the same buyer that wants to purchase a resale.
Experienced Originators know that there are many things that can go wrong during a transaction, and want to anticipate all possible variations to set expectations for everyone involved. When you cannot talk to the appraiser about trends in the neighborhood prior to the report there are many surprises. Enough said.
Finally, there are the positions taken by mortgage brokers and mortgage bankers on HVCC. Brokers and bankers are not on the same page. The Mortgage Bankers Association (MBA) statement on HVCC differs from the National Association of Mortgage Brokers (NAMB) statement . The NAMB believes they can police appraisal fraud within current regulatory and operational processes. The MBA wants oversight and standardization that applies to all.
Homebuyers and Homeowners – Which group do they fit into, Fan or Critic? Hard to say because homebuyers want the lowest price when purchasing, and the highest price when selling. The lending community needs to protect consumers from self servicing interest of commissioned sales people, and we need to get this right. Over the last decade, lenders have given homebuyers exactly what they wanted without the financial literacy and prudent risk management advice that should have gone along with it.
I don’t know if there will be a HVCC moratorium or not. But we owe it to our communities to tweak the Code so it is fair for everyone. Only then can we restore health in the housing finance industry.
I am very interested in the opinions of others inside and out of the lending industry on how the code has affected you on a recent transaction. Feel free to commen about your experience.
Comments
"I was not sure if I should put Appraisers in the fan or critic group."
From the articles I have written on the subject and the subsequent responses, appraisers aren't too happy.
Nice article,
Tim Manni
blog.hsh.com
I think it would depend on how you phrased the question to appraisers. Since AMC's are offering lower fees, I'm sure appraisers are very unhappy with their lower income prospects. On the other hand, if you asked them there thoughts on whether they are happy with the significantly reduced undue influence over values, I would bet you would get a much different response than to the first question.
Tweak the code? Lenders already tweaked the code to allow them to own and operate appraisal management companies. The original code before Jan 1st 2009 prohibited this relationship. There are more than enough laws out there to oversee the industry, they just need to be enforced.
We have had nothing but hardship with this. We knew the "bad" appraisers, and stayed away from them, now we have no choice and are held hostage to pay whatever the appraisers demand at the cost of not closing the deal. We have seen a 50% increase in cost of appraisals and 75% decrease in customer service! I hope all the legislators experience their frankenstein intimately.
See related article "Benefits of building a green home" in "Great Recession" section of Phoenix Examiner (Green Business).
Could someone please explain this to me? Wasn't it eAppraiseIT, an AMC owned and coerced by Countrywide, issuing fraudulent appraisals at lender request ... was it not these people that brought the whole thing to a head to begin with? And the solution: Everyone has to use AMCs! ??? AMCs, who are unregulated, and allowed to make obscene profits for running websites. AMCs, who are now proliferating like rabbits, and who will soon be forced by competition to ... you guessed it ... come up with "useable" appraisals or loose their obscene income stream to another AMC who will. (This is simply history repeating itself ... remember eAppraiseIT?). AMCs are also closing membership applications to only "co-operating" appraisers. Now as an appraiser you don't have only one beligerent customer, you have your whole income source extorting you! (Anyone remember Landsafe????) So, tell me, how is this supposed to work other than being a complete and utter disrespect and disregard for USPAP ???
Get rid of required appraisers all together. The industry is complete waste of time, absolute joke and un-needed tax on the real estate transaction.
If I am a lender, then it is up to me to guage the risk and price, not to pass that cost onto the borrower!
Why is capitalism so difficult for all of you realtors?
This new law is ridiculous and Cuomo is an idiot who doesnt know the 1st thing about real estate. Now, costs are being passed on to buyers who are geting what they are paying for. Problem being the appraiser only gets about half the fee and the AMC takes the rest, for what, emailing the appraiser the contact information for access to the property. Just another way for these lenders to embezzle money. With no choice in the appraiser, now you've given these over aged adolescense morons the opportunity to stay in the industry. At the same time, the good, professional appraisers are moving on cause they know they dont deserve the pay cut they have been given by Cuomo though I'm sure this new rule doesnt apply to him when wants to sell his house.
These whiners got no love coming. They did this to themselves. If they didn't want their morals legislated for them they needed to be moral NOT immoral.
The individuals who helped to bring the industry to it's knees are no longer in the industry. Those of us who are, are taking it on the chin. We must let current regulations take hold. The HVCC is a farce. We had an AMC appraiser visit the home of a long time customer. He asked her who she was financing with, she said a mortgage broker. He told her to go to a bank, said mortgage brokers were bad. She asked for his business card and he said he didn't have any on him. She told him she had done numerous mortgages with our company and held us in high regard. He said all mortgage brokers were bad. Now, tell me, should I hope to have this unprofessional appraiser assigned to a future transaction of mine? After 25 years of originating mortgages ethically, with my customer's best interest at hand, do I have the ability to call this unscrupulous appraiser on the carpet? No, I don't. What's wrong with HVCC? It's wrong on many, many levels. This is just one small example of it's impact
First off, it was WaMu and Eappraiseit, a AMC owned by first american who were the instigators of the fraud in the first place.
Which is really strange to me that the solution to the problem is going to be what caused the problem in the first place?
Also, Cuemo was on the board of a AMC, and they also contribute to his campaign
What most people dont understand is that the lenders own a piece and sometimes all of the AMC so they get paid either way.
Its a Win Win situation for them.
As far as appraisers, the only way to get on a AMC list is to play ball,,Low fees and Fast turn times are the keys.
The AMCs have the Borrower tell the Appraiser the number to hit so the deal still gets done.
So if Qualifications are no longer a criteria and fees are back to pre 1981 levels and the costs are going up,
Who do you think are doing the AMC appraisals?
Mainly unqualified and uneducated appraisers.
The qualified appraisers are being driven out of business.
Runner
The problem at hand is the mortgage business itself. If a bank can sell off their loan to someone like FNM who then breaks it up and sells it off in pieces, then there is no risk for the bank. Who cares what about an appraisal.
Mortgages were fine for decades, until banks were able to sell of their portfolio and the MBS was created.
Appraisals are needed and the truth of the matter is that capitalism only works on the way up, on the way down everyone wants to change the rules. Its fine when everyone is making money but god forbid if they lose it.
In the stock market when you lose then its your fault, however when your home price declines everyone starts pointing fingers, changing rules, changing the way business is done.
The truth is that home prices are too high, the demand has now slowed, if prices were cheaper there would be more sales. Case closed.
I'd like to add one additional point. Average house prices should never exceed 2 1/2 times the yearly income of the people in that area. Sure there are certain places like Hawaii that you have competition from overseas investors but the average prices of homes in most parts of the country have exeeded 6 to 8 times yearly income. They still remain 4 to 5 in many areas.
Our financial and banking industry have created this mess, by allowing people to have no doc loans, and allowing them to stretch beyond their means. In years past, a bank would highly scrutinize your debt/asset ratio, your job and would want a sizeable deposit of 10 to 20%.
The rules were changed by allowing our banks to become national and then global instead of local and community banks. This is what led to the bubble in real estate.
On top of all of this we created financial instruments like MBS to sell to investors. Lets go back to time tested practices instead of changing the rules again.
Complete disaster for me.
Signed up with an AMC in May. Performed 15 appraisals for them.....have yet to see a single payment for any of them. Putting me in severe financial jeopardy.
The AMC is paid up front. Many of these transactions closed escrow weeks ago. Everyone has been paid except me. OUTRAGEOUS
Feel completely RIPPED OFF.
Originators bypassing rules anyway. Been harassed about value numerous times. If I turn anyone in....I can be blacklisted forever if the HVCC is repealed.
sb in Norcal
The lower fee is a problem but NOT the biggest problem. The AMC's (Appraiser Management Companies) instituted with the HVCC have few qualified reviewers in their QC departments. The majority of whom have little to NO appraisal experience. Appraisers are feeling MORE pressure for values now MORE than ever. The pressure is to come in LOW not higher. Banks do not want to make loans of any sort to anyone in this market. We are getting our values knee capped...even if they are supportable and valid. Number hitters got the work on the way up and those that comply with lower values get the work on the way down. Same song...different dance. Who wants to do twice the work for half price? A honest and ethical appraiser can do about 1 home appraisal a day. It takes time, effort, and experience to complete a thorough examination of your homes market area and deduce a value based not on just what has sold but what is offered for sale. The builders/sell fail to admit to the principal of substitution
Not sure if anyone else has seen this in other markets---I am an appraiser here in Austin trying to refinance my house. Our neighborhood (new development)has seen some modest decline in prices. However, the lender's appraiser came in well-below what we paid in 2005 and after a couple of years of price appreciation. It appeared as though the appraiser went out of his way to come in with a "low" value. Seems to me that some of these appraisers who didn't have to think too hard when the market was going up are now over-reacting to the current market. Am I a victim of HVCC too?
The HVCC is doing more damage than it was created to get rid of. There is nowhere to report violations, no oversight. Small fees mean poorer quality of appraisals. After 34 years it is driving me out of business.
Ok. Enough complaining. Here's the solution:
1) Set up a NON-PROFIT appraiser panel that would be the ONLY place lenders and brokers can order appraisals. (Maybe handled by The Appraisal Institute or something, but must be NON-PROFIT. Only small operational fees to be charged.)
2) Licensed appraisers can sign up for assignments, and agree to be regulated by the Panel. Appraisal licenses will then work like drivers licenses, with points for against you for bad work. And bad work will be measured not by the value arrived at, but by the measure of adherence to good appraisal practices, something already codefied with USPAP.
3) Appraiser will recieve assignments in a rotating fashion, and if not disciplined per item 2 above.
4) Appraisers will collect fees directly, and will be allowed to speak with ANYONE. Did someone forget that appraisers are in the information business? We should be able to consult with anyone - Buyers, Sellers, Brokers, Other Appraisers. Anyone.
Just wanted to add a commentary to my "solution" in a previous note. The reason this would avoid undue influence is that the Non-profit panel would assign appraisals in a random, rotating fashion in accordance to the market areas selected by the appraiser. Lenders cannot select appraisers. The appraiser will suffer minimal value pressure (high or low) as they would never know who the next client will be. They will have no "do this one and I'll send you more" or "come in at this value or I'll never use you again" type of pressure. This is the reason that independent appraisal managers were considered at all, but the use of unregulated AMCs interested in huge profits than anything else is a mistake. The same type of value pressure will be exerted on them over time, and worse so because some appraisers are ending up in the situation of only one AMC client. Also, the current AMC governemnt sponsored oligopoly is leading to a drastic reduction in the quality of appraisals produced.
I own a small appraisal firm with 7 employees. Every appraiser I know hates these rules. These rules were re-written by lobiests and now favor the companies that contributed the most to the mortgage melt down. Every appraiser is not ethical, but there are a lot of very ethical folks trying to earn a living that are being put out of business. Who will be left in 6 months? The least ethical appraisers who are willing to do a sub standard job for sub standard fees are the ones that will succeed in this farce of a system.
The removal of the corporate independence clause, allowing bank and title company ownership/control of AMCs is a crime against consumers and professionals within the lending industry. A dozen companies now control the entire process. These rules create a virtual monopoly. Fees are sub standard, experience & qualifications mean nothing. Do you want the lowest bidder performing your appraisal while you are charged double his rate? Insiders know this is a joke.
Julie, I just wanted to add something. I was both a realtor and now appraiser for 11 years. I can tell you it takes a lot of efford on part of Homebuyer, Seller, Realor, Mortgage Originator, Processor, Appraiser, and yes Attorney to keep the business go round and round. To make things work participants must jump throuht hoops. Placing a stumbling BLOCK - HVCC in the middle - only makes AMC'S profit. EVERYONE's business is hurt by this along the way. When QC People will start getting laid off - they will sing a different song. I am estimating if this keeps on only 20% of business will remain, values will continue to fall, we could possible enter a depression. I am basing this on a simple observation, when rates were historicly low 4.8 there was indeed a lot of business, when rates went back to normal 5.3-5.5% only 20% of business remained. I am signed up with 60% of those who order appraisals now under new laws. If this regulation stays - we are all in deep trouble ! ( thank you)
The time has come to take back our industry and expose the HVCC and Cuomo for the fraud that it is. Lenders own the AMCs' and Cuomo serves on the board of an AMC. Enough said?
The HVCC has taken honest appraisers and cut off their knees. After 20 years of constantly upgrading my education, working diligently to do the best possible job, I have no more credential with an AMC than the person who got his license yesterday. The HVCC is the mechanism that is taking small business out in large numbers and passing the fees over to large businesses whose only aim is a good bottom line, not a good appraisal.
The cost of the appraisal report has increased about 50%, and the quality of the report has decreased.
Vacant, neglected foreclosures are being compared to my clients' cherished homes.
In addition, there is a prohibition on communicating with the appraiser. Someone name an industry where lack of communication has improved a product.
25 years and I cannot work. most AMC's are taking 60% of the fees and many are owned by or opperated by the lenders. This means that if teh lender does not like your appraisals, they can cut you off from the AMC, like blackballing. This has already happened to me with 3 AMC's and I effectively out of business for doing appraisals the way they should be done, Ethicaly. I'm about at my wits end. They are so concerned about keeping the lender happy, we are being over conditioned, required to turn appraisals in 24 hours (how can a quality report be completed that quickly?) and being told what our territories are. I have MLS access and knowledge of 3 counties and they won't let me appraise more than 30 miles from my HOME? What does my home have to do with my expertise? I had an office in Valley and trained in Santa Clarita and South Bay. I know these neigborhoods. New appraisers cannot read permits. I was accused of deliberately undervaluing a home for this? The other appraiser was wrong.
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