The Home Valuation Code of Conduct and how it impacts Tucson real estate is also a concern of Tom Health, Vice President of Advocacy for the Southern Arizona Mortgage Lenders Association, Legislative Chair for the Arizona Mortgage Lenders Assocation and Director of the Arizona Association of Mortgage Brokers.   Tom is guest blogger today and what follows are his comments about the HVCC.

Thanks for taking the time to shed more light on the Home Valuation Code of Conduct (HVCC).  You touched upon several issues that are critical in understanding why we have to recall this policy and put in place a more meaningful method of ensuring quality appraisals.

You mention this is a “de facto regulation,” which is the perfect description.  HVCC was not implemented by an agency as a regulation, or by Congress as legislation; it was an agreement between one man and two, at the time, privately held companies.  The policy of HVCC circumvented standard public commenting periods and debate that would have been required if this were an actual regulation or law.  The Attorney General of New York, Andrew Cuomo, threatened Fannie Mae and Freddie Mac with massive lawsuits if they did not comply with this code.  The weak companies feared “tobacco type” lawsuits across the country and succumbed to the AG’s demands.

The foundation for this agreement was an investigation launched by the AG into alleged appraisal fraud resulting in values that were unrealistic, but led to huge earnings for a large national lender and their partially owned subsidiary appraisal management company (AMC).  Whether the attorney general had a foundation for his threats is not known, because as part of the agreement was to keep the results of the investigation undisclosed.

Due to the implementation of the HVCC, most lenders now work with an AMC, which is an unregulated entity and is often owned, in part or in totality, by the bank for which it performs appraisals.  Ironically, Cuomo’s code has led to the dominance of the very structure that prompted the investigation that led to the code.

What was intended to protect consumers from unscrupulous originators and appraisers has created a more expensive process for the borrower and created a lower quality and less reliable product.  You accurately point out that the cost of a report has increased, but the compensation to an appraiser has decreased.  Quality appraisers are unable to work for the reduced income and therefore, orders go to less experienced practitioners.  Many times, the appraiser is brought in from areas outside of the market and is unfamiliar with trends and characteristics of the property being inspected.

In addition to cost and quality, the code has presented a “portability” issue.  Consumers typically pay for the appraisal at or prior to time of inspection.  While the code allows the report to be transferred to another lender if the borrower so wishes and the appraisal is HVCC compliant, the reality is much different.  One large national lender has a written policy that it will only accept reports completed by its wholly owned, subsidiary AMC.  Any borrower wishing to switch to this lender would likely have to have to bear the cost of another appraisal.  This same lender also stipulates that it will only release its reports to other lenders if the borrower is declined or counter offered on the terms of the loan they requested.  In other words, if that lender wants the loan, they will not release the report even though the consumer has paid for it.

The only vocal supporter of HVCC is a professional group, Title/Appraiser Vendor Management Association (TAVMA), whose members are large AMC’s.  The Appraisal Institute has supported the HVCC mission of appraiser independence, but has asked for changes.  Fannie Mae and Freddie Mac are noticeably silent on the code.

The prevention of appraisal fraud and coercion has to be eliminated, but HVCC is a poorly planned and improper tool for the job.  Congress has introduced HR 3044 that would place an 18-month moratorium on HVCC and allow regulators to create a workable solution that takes the good intentions of HVCC and melds them with practical procedures that can strengthen the industry and protect consumers.

 

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Tom is with Consolidated Lenders, The Heath Team  

 

 

 

 http://www.theheathteam.com/

 House Bill 3044:

http://www.govtrack.us/congress/billtext.xpd?bill=h111-3044

 

 

 

 

 

 

 

 

 

 

   Tucson real estate sales, although improving, now is also adversely impacted by the Home Valuation Code of Conduct (HVCC), a de facto regulation promulgated by Andrew Cuomo, Attorney General of the state of New York in conjunction with Freddie Mac and Fannie Mae.  Loans which are not Fannie Mae or Freddie Mac loans are not governed by the HVCC.

   The intent originally was to insure appraisals are done in accordance with independent safeguards, that appraisers were not coerced to hit a value specified by the lender or loan officer.  The HVCC lays out ten areas of concern Cuomo had regarding lenders and appraisers.  But rather than independent appraisers, Appraisal Management Companies (AMC) have surfaced and are a profit center for large banks which underwrite many of the Fannie Mae and Freddie Mac loans.  Appraisals must be ordered and “The Code requires the lender or any third party specifically authorized by the lender to select, retain, and provide for all compensation to the appraiser”1

   As a result, many independent appraisers and small appraisal companies can not longer afford to remain in business unless they join one of the AMC pools.   Lenders, erring on the side of caution, may no longer use these small independent companies because they are not an AMC. 

   Additionally, the cost of an appraisal has escalated.  There is another level of management involved with the AMC.   Appraisals used to cost between $325 and $375; now they are $400 plus.  Ironically, the appraiser, the person with the expertise, is now paid at least $100 less than pre-AMC.   The differential goes to the AMC.

    Appraisers new to the market join the pools to beef their resume and gain experience.   Lenders request the appraisal from an AMC approved by the entitity subsequently underwriting the loan.   Appraisals may be done by people who do not know the area,

      Appraisers have guidelines and take some of  their comps from within a mile of the  property.  Tucson properties have been appraised by out of area appraisers and these appraisals may come in unusually low.  In a one mile segment, one 1/2 mile area may have custom built homes valued at $800,000 whereas the other 1/2 mile segment may have tract homes valued at $250,000.   Each property may be 3,000 square feet but looking at paper, the appraiser does not know the difference.  This skewing would occur  with automated valuation models which are not prohibited by the code. (http://en.wikipedia.org/wiki/Automated_Valuation_Model)

         As a Realtor representing my client, I often spoke with the appraiser and provided my comps with other pertinent  information.   If I represented a property and knew the comps showed two distressed properties, I made sure the appraiser understood.   Perhaps I knew a property had been flooded or there had been a fire, this information materially impacts the value of that home…it should not materially impact the value of the home I am trying to sell.   Understanding the area or the history of the area and properties is part of the knowledge base used to make good decisions.  

 1- Fannie Mae guidelines FM 0109 page 2 2009

Resources:

Home Valuation Code of Conduct 

http://www.freddiemac.com/singlefamily/pdf/122308_valuationcodeofconduct.pdf 

http://www.appraisalinstitute.org/ano/current.aspx?volume=10&numbr=11/12

https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/appraisalguidance.pdf

http://www.freddiemac.com/singlefamily/hvcc_faq.html

http://www.fhfa.gov/webfiles/277/HVCC122308.pdf

http://narblog1.realtors.org/mvtype/president/2009/06/all_is_not_quiet_on_the_midwes.html

  http://narblog1.realtors.org/mvtype/appraisalinsight/cuomo_agreement/

http://appraiseractive.blogspot.com/2009/07/hvcc-update-nar-president-charles.html