Many people are attempting to refinance their homes, but are finding that their homes appraise at ridiculously low values that won’t support new loans. Others are attempting to sell their homes and receiving multiple offers at a decent “market price”, only to have the appraisals come in unrealistically low. Why? The reason is the new HVCC rule or the Home Valuation Code of Conduct. The HVCC rules went into effect May 1, 2009 and HVCC has been a disaster. The National Association of Mortgage Brokers (NAMB) President, Marc Savitt calls it “a train wreck”. The law needs to be changed before it kills the budding recovery of the San Diego real estate market.
The new Fannie Mae and Freddie Mac guidelines require the new HVCC standard of appraisal for all loans that they originate or purchase. In most communities, Fannie and Freddie now account for most of the mortgage loans. We’re not just talking about San Diego real estate. This affects homes and home owners across the entire United States.
The goal of HVCC was to protect the consumer by keeping fraud out of the appraisal process. It started when New York Attorney General Andrew Cuomo filed a lawsuit against First American and Washington Mutual in 2007, with the intention to improve the reliability of home appraisals. “The integrity of our mortgage system depends on independent appraisers,” said Cuomo.
The result was the HVCC which has boils down to this: Brokers are no longer able to have any contact with appraisers. Only the large financial institutions can order appraisals (Huh? How was this supposed to help?), and they must do so by placing orders through Appraisal Management Companies (AMC’s). Independent appraisers who want to keep their jobs and their businesses must now join AMCs. This means giving up 30-40% of their income to the AMC. (So in essence, independent appraisers are no longer independent.) The AMC’s are often owned by… you guessed it… the large financial institutions. So the AMC’s, the supposed firewall between lenders, brokers, and appraisers, are actually just another inefficient, bureaucratic layer in a real estate transaction. And the AMC’s are unregulated. This is a train wreck.
Another problem is that AMC appraisers are being called from one city to appraise properties in another city. For example, San Diego homes are now being appraised by Los Angeles appraisers. The appraisers have almost always been local in the past, and familiar with local property values. Now it is the cheapest appraiser (or perhaps the appraisers who have the best connections with the AMC’s) who get the business. Appraisers are no longer selected based upon skill, knowledge, or reliability. Reportedly, a lot of these appraisers don’t even have access to the local MLS. The person assigned to appraise your home may have never ever been in your neighborhood, city, county or maybe even state! Instead, many of these AMC appraisers are less experienced, and they are using computer models to do the appraisals for them (Can you say Zillow?). Often this means comparing upscale luxury homes to the ramshackle foreclosed homes down the street.
The HVCC rules have increased appraisal processing times and also greatly increased costs for consumers. Neither the real estate brokers nor the mortgage lenders are able to have any contact with the appraisers, even if the appraisal request is incomplete! Requests for additional information must first be given to the AMC, and the AMC passes along the request to the appraiser. Often this game of pass-the-buck is creating delays of two weeks or more just to get information that should be available with a 2 minute phone call! One appraiser told me that it takes up to three weeks before the AMC even assigns a case number. The appraiser is ready to do the job, but they can’t talk to anyone about the property, and they can’t contact the lender or the real estate agent to get started. The lenders experience delays, complaining that they can’t get the appraisals back on schedule, but nothing happens to resolve the situation because no one is allowed to communicate with each other!
We’ve already mentioned that the appraisers are getting lower appraisal fees, but the consumers are being charged more for appraisals. Why? The typical scenario now goes like this: The AMC charges the consumer $450 for an appraisal that would have cost $350 just a few months ago. The AMC goes to their list of appraisers and finds one who is willing to take $300 to do the job. The AMC takes $150 as their cut. The low-priced appraiser performs a low-quality appraisal, and the process takes three or four times as long as it should. It’s hard to see how this benefits the consumer. And worst of all, many of the best appraisers are simply closing shop. No self-respecting professional can work like this… and they shouldn’t have to!
The additional expense and frequent delays are just the tip of the iceberg for the consumer. The end-result is an incompetent appraisal. The appraisals are typically below value because pressure is being applied by the AMC for the appraisers to avoid overvaluing properties at all cost. So even after paying more for the appraisal and waiting FOREVER for the appraisal to arrive, the consumer home-buyer learns that they can’t purchase the home that they want. The home falls out of escrow, and the home seller is now tainted with a low appraisal, even if there were multiple offers in excess of the appraised value. The HVCC rules are not good for the consumer!
Often the home seller and prospective home buyer will try to work together to complete the transaction, so the HVCC rules often open up a new round of negotiation between the buyer and seller. In other cases the loan originators are processing “appraisal rebuttals”, but this process causes even longer delay. And time is money on both sides of a real estate transaction. The home sellers may have already moved out or purchased a replacement property. If the buyer has locked an interest rate in expectation of a particular closing date, then the loan lock is likely to expire. If rates have moved up, the buyer will usually just walk away. Neither the buyer nor the seller is likely to gain under this scenario.
There are only two winners under the HVCC rules: 1) The big institutions who now own another money-making arm… the Appraisal Management Company; and, 2) The incompetent appraisers who offer low-cost, low quality appraisals. No consumer has been helped by the HVCC.
You can make a difference. We strongly encourage you to sign the HVCC petition encouraging lawmakers to rescind the HVCC rules. Simply go to https://www.hvccpetition.com/. There is currently legislation calling for an 18 month moratorium on the HVCC rules (HR 3044). Help take the bad law off the books and give legislators time to create a better policy that actually does help consumers.