The Home Valuation Code of Conduct and How it Could Adversely Affect You
Jul 12, 2009 Real Estate Properties
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On May 1, 2009, a new set of rules regarding the processing of appraisals for Fannie Mae and Freddie Mac loans went into effect. The Home Valuation Code of Conduct, or HVCC as it is known, was intended to curb fraudulent mortgages. This new code was in response to an investigation conducted by Andrew Cuomo (the Attorney General for New York) into the appraisal practices of Fannie Mae and Freddie Mac (GSEs or Government Sponsored Entities). Basically, Attorney General Cuomo agreed to stop the investigation if Fannie Mae and Freddie Mac would change their appraisal process.
The HVCC is an effort to clean up the mortgage industry. Although there are many good initiatives in this new code, there are many unintended consequences adversely affecting home buyers, home sellers, mortgage brokers, agents and appraisers.
No more independent appraisers! Now, they must join an Appraisal Management Company or find a way to get on a preapproved list. The HVCC was designed to regulate the appraisal process by creating rules that effect anyone who is paid by commission once a loan is closed (realtors, mortgage brokers, loan officers, etc.). Anyone on commission is unable to communicate with the appraiser. All of these professionals have spent years creating business relationships with well qualified, knowledgeable appraisers and now these relationships don’t matter anymore. In other words, loan officers and agents are not allowed to choose appraisers based on their familiarity with a certain market.
When an appraisal is ordered, the appraiser puts the report in the name of the lender making the request. If the lender is changed, a new appraisal must be requested in the new lender’s name which increases the costs to the buyer and the time to close. A buyer may be hesitant to change a lender with whom they are dissatisfied because of the potential increase in costs and time. If the buyer has a rate lock, they may need to extend the lock for longer periods of time.
The National Association of Realtors, The National Association of Home Builders and the National Federation of Mortgage Professionals are faulting the HVCC for new and existing home sales falling short of expectations in May. Unfortunately, low ball appraisals are forcing home sellers to either appeal the appraisal or reduce the agreed upon sales price for their home to the appraisal amount. Most sellers are not in a position to reduce the sales price and the contract falls apart.
Appraisers are now the only industry with restrictions prohibiting communication with their customers. Remember, appraisers may not communicate with agents, loan officers, mortgage brokers or real estate brokers because they are paid on commission. Just as real estate agents pay a portion of their commission to their brokers, appraisers are required to pay approximately 40% of their income to the Appraisal Management Company with whom they work. These restrictions on communication and compensation could drive many experience appraisers out of the market and a time when we can least afford it.
CNBC interviewed several agents across the country regarding the low ball appraisals. Agents and brokers believe that 1 in 4 transactions are being adversely affected by the Home Valuation Code of Conduct. Therefore, NAR (National Association of Realtors) has requested that HVCC rules be suspended for 18 months to cut down on these negative results
Basically, appraisers are caught in the middle. Lenders and regulators want appraisers to use distressed and foreclosed properties in the Home Valuation Process so they have an idea of the market and they want appraisers to be conservative in their valuations. Buyers, sellers and agents just want to do the business of buying and selling homes and they want accurate appraisals. Not too long ago, the market value of a home was what someone was willing and able to pay for that home. Now, there seems to be a manipulation of the prices and process because of all the unintended consequences of the regulations.
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