HVCC, the acronym for “Home Valuation Code of Conduct”, is the result of a legal settlement between NY attorney general Andrew Cuomo and Fannie Mae & Freddie Mac to assure that appraisers would not be unduly influenced by lenders in the appraisal process. Before this ruling, mortgage brokers and bank loan officers would order the appraisal for a new home loan from any licensed appraiser, usually one they knew professionally for many years. After this ruling, appraisals are not allowed to be ordered by the mortgage broker or loan officer, the bank now orders them from an “Appraisal Management Company” (AMC). Mortgage brokers and loan officers are no longer allowed to have any direct contact with the appraiser. Appraisers are supposedly being more scrutinized by the AMC’s. The law became effective on May 1st 2009 and has been causing problems ever since for buyers, sellers, and industry professionals across the country.
With evidence of mismanagement and fraud in the industry in the past, the attempt to ensure that residential properties are not appraised for more than their true worth is understandable. The intention was to stop lenders from pushing appraisers for higher values to help “make the deal work.” The belief was that this, in part, is what drove property values to unrealistic levels. The process under the new law takes ordering the appraisal away from anyone with a vested interest in getting the loan done.
But, as often happens, the attempt to right a wrong in an industry becomes over-regulation or has unintended consequences. We are losing excellent, qualified appraisers due to the effect the law is having on their incomes. Now, orders for appraisals might be sent by Appraisal Management Companies (AMCs) to those who charge the least or may have the least experience. AMCs rotate the appraisal orders through their members, tacking a fee for doing so. Good appraisers who have grown their businesses based on their contacts and relationships in the industry with mortgage brokers and loan officers, are now competing side by side with newer appraisers who will work for less. Some of the downsides of the new process are:
-Appraisal costs have gone up so AMC’s can build in their piece of the fee. A standard appraisal fee was $350, it is now $400-$500, and the AMC may take a quarter to as much as half, leaving a lot less for the appraiser than they are used to. It used to be that the appraiser got 100% of $350, now they may get 50% (or $225) of $450. So you can see how the cost has gone up to the consumer, and the below has happened…
-Some excellent appraisers have been leaving the industry since they are suddenly working for substantially less money.
-Accuracy in appraisals has been reduced, since less experienced appraisers willing to work for less are now competing for appraisals.
-Appraisers may come into a marketplace from points very far away with no idea how the local marketplace works. Before this new ruling local appraisers were hired who knew the market and usually had street level knowledge of the neighborhood they were appraising.
-Should the loan not go through, the consumer must start the process all over again and get a new appraisal with a new lender. This not only adds even more cost to the buyer, but adds a lot of time to the loan processing as well.
Consumers are who the law was designed to protect! Appraisers have seen their income cut. Lenders are finding it can take longer to get an appraisal from someone they have no contact with and no history with, so turn-around times may rise and loan processing times can increase.
I do believe that there has been occasion in the past where a lender pressured an appraiser to “make a deal work” and make sure a home appraised at a contract price. And I do believe there have been Realtors that have pressured lenders to pressure appraisers to make a deal work. But I think this was the exception, by far, as you cannot make up fake comparables or make up values for a home. There is also something called “the underwriting process”, let’s not forget it is difficult to get improper comps past an underwriter. And I simply think there must be a better way to root out the occasional fraud. Common sense? Buyer beware? Require two appraisals? Require appraisal reviews? There has to be a better method beyond problematic policy and drastically altering appraisal procedures.