Home Valuation Code of Conduct (HVCC) – Blessing or Curse?

Ok boys and girls – what’s the answer?

Update 3-14-2015: The results of the Philadelphia Federal Reserve study of impact on real estate market published in August 2014 revealed that the HVCC “did” lower over-inflated appraisals, but also had the detrimental affect of increasing the number of “low value appraisals” resulting in loan denials and lost real estate sales. (Note: To prove the infinite “responsiveness of regulations to changing environments” of our federal regulators – this study also revealed that AMCs (Appraisal Management Companies) had almost 3 times the low appraisal/loan rejections than directly ordered by the lenders. This happened mostly where prices are rising faster than appraisers are allowed to respond. Of course the counterargument is what happens if prices in these same areas drop faster after they rose faster…but that’s when people stop buying…because the economy is tanking!)

Yep – you got it – it all depends….on who you ask.

Mortgage brokers, appraisers, and real estate agents are against the HVCC.

Mortgage lenders and appraisal warehousing companies are for it.

Why? Money, of course!

The HVCC establishes a middle-man (i.e., warehouse appraisal companies) which essentially receives the appraisal order from a lender, keeps a portion of the appraisal charge, and then hires the appraiser (for less than they used to receive) to perform the appraisal. It was established as a response to mortgage fraud during the past decade. There was a certain degree of collusion between mortgage brokers and appraisers to “make the appraisal work” for the sales price regardless of value just so the deal could close. Mortgage brokers and real estate agents only get paid when properties close.

Since established in May 2009, the HVCC has resulted in several appraisals (anywhere from 20-40% or more) not meeting sales price and therefore killing deals. Result: No income.

Mortgage lenders own stakes in these warehousing companies and thereby benefit from the recent surge in business. Stop the HVCC and – no income.

Oh, and some lenders are currently objecting to proposals in the financial regulation overhaul bill regarding the disclosure of how much of the appraisal cost goes to the warehouse company.

Source: WSJ article 6-18-2010, Page A6.

Bottom Line: It’s not a perfect system – yet. This has made me more aware of the variance in appraisals between appraisers and how an appraiser who knows the local community has a better grasp on its direction, but still needs to follow specific objective and subjective guidelines. Since there is subjective influence, there will be variation between appraisals. But I favor the choice of an appraiser through warehousing that is located within a 10-15 mile radius of the property because they will have more awareness of what’s happening closer to their home than to go 25 miles away and spot check a community they do not know.

I also favor the concept to remove the influence of the appraiser from the lender’s control, but who should have a financial interest in the appraisal warehouse company? I don’t believe these companies should be owned by the very people who have direct benefit over it control – lenders.

Update 8-5-2010: H.R. 4173, the Wall Street Reform and Consumer Protection Act effectively enables the termination of the HVCC in November 2010. That’s both good and bad news depending on the future legitimacy/quality of appraisals and relationship between lender/appraiser. Let’s hope that there is an arms-length transaction, appraiser is fair and knowledgeable of local market, and appraiser gets more of the appraisal fee for starters…

Update 12-18-2010: It appears that the Dodd-Frank Financial Reform Bill caused the Federal Reserve to implement new Appraiser Rules – We will see if the industry is better off or worse than HVCC was – http://realtytimes.com/rtpages/20101118_wallstreet.htm

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