Back on May 1 of this year the Home Valuation Code of Conduct (HVCC) took effect.  This new code was adopted to counteract many of the home appraisal abuses that contributed to the housing bubble that burst in 2008.   One of those abuses was the pressure pt on appraisers to inflate appraisals in order to ‘close the deal.’   Since mortgage companies and real estate agents only get paid when the deal closing, many abuses did occur.  As with most government ‘cures’ this new law is accompanied by unintended night mares.

Heres a link to video clip I ran across that explains the situation:

NAR Video

The HVCC created a sort of firewall between mortgage loan underwriting and those people who hire appraisers.  It’s supposed to help appraisers stay neutral and keep outside influence from gaming the system.    Obviously this is a noble idea.  So what went wrong?

First of all, first of all consider how this code came to be.  Andrew Cuomo,  New York State Attorney General and Fannie Mae came up with this agreement.   After numerous lawsuits Cuomo was able to basically right the code himself through legal intimidation.   The group at the center of the controversy, appraisers were completely left out of the code writing process.

Then in order to comply with the HVCC many mortgage companies decided that the best way to comply was to employ Appraisal Management Companies (AMC).   Even though lenders can hire appraisers themselves if they put appropriate safeguards in place, are choosing to work with appraisal management companies (AMCs) to select appraisers.   The law has been a financial windfall for these paper pushing AMC’s.    In the meantime many small appraisal firms have basically shut down.   AMC’s now are able to select appraisers based mostly on price and fast turnaround.   In some areas appraisers who were getting $350-$400 as independentt appraisers are being paid $175-$200.  AMCs still charge $350-$400, but they stuff as much as they can in their own pockets.  Competition among appraisers benefits the AMCs not the consumer.  A survey of National Association of Realtors members finds that, as a result of the increased use of AMCs, fees to appraisers are going down, appraisals are taking longer, and, perhaps most importantly, deals are falling through when appraisers are chosen who aren’t familiar with a market area.  The well intentioned HVCC is actually hurting the consumer.

Solutions

In the long run I expect that some sane legislation might get the HVCC revised.  We can all hope this happens soon. I’m not holding my breathe.   For my part, I feel it’s my job to help my buyers and sellers now.  I will inform my buyers and sellers of the potential problems in dealing with appraisals coming out of AMCs.   Buyers should be made aware that there are lenders who have taken the proper steps to deal with HVCC  without having to hire AMCs.

Technorati Tags: Andrew Cuomo, Appraisals, HVCC, real estate finance