Home Valuation Code of Conduct (HVCC) – The New Appraisal Law
Tuesday, June 9, 2009 | 2 comments
It has been a little over a month since the HVCC has been in effect at the mortgage banks and the real estate industry is starting to see the implications of this new law. No longer can the mortgage broker or direct lender chose the appraiser for conventional financing. The lender must go to large appraisal company, which randomly assigns an appraiser for the valuation. Formerly independent appraisers must join these firms to obtain loan appraisal work. The appraiser will only get a portion of the appraisal fee, with the rest going to the appraisal company. Both new homebuilders and Realtors reselling existing homes are talking about their reservations about this new law and the early results so far. Builder Magazine reports the response from new homebuilders and covers three main issues coming from the HVCC. (see link for full article). http://www.bigbuilderonline.com/industry-news.asp?articleID=988037 These concerns are:
- Random selection of low paid appraisers will not have the expertise to accurately value the property. They will chose low values to “play it safe” and protect the lender, and they usually value at 10% – 15% less than market value.
- The appraisers are using distressed home sales as comparable sales, including short sales and homes that are bank owned. The difference between distressed homes and new homes is significant. There are many reason buyers would want a new home and this year has extra incentives for new homebuyers.
- Appraisers adjusting values based on their estimation of their expectation of the market to decline further. Builders believe the appraiser cannot make this opinion accurately and it varies so much from one local market to another.
They also noted this law has reduced loan choices, by making it more difficult for mortgage brokers to originate loans, and the HVCC law has delayed escrow on average of 3-5 days.
Real estate agents who are selling existing homes are also having concerns about this new law. Many listings are now having multiple offers. The listing agent may feel he has chosen the best offer, one with conventional financing, and a large down, and the highest price. However, there’s a surprise coming down the road. Because the appraisers are backed up (few appraisers can work that cheap) the buyer’s loan contingency has often passed by the time the appraisal comes in. Appraisals are coming in about 21 days after being ordered by the lender and are coming in low most of the time, often 10%, 20% or more. A new round of negotiation must happen, and usually the seller must reduce the purchase price accordingly. The losers in this deal are:
- Appraisers. They now a fraction of the pay, for the same job.
- Sellers. The homes will be appraised below market value.
- Realtors. Escrows are being delayed and there are many more failed sales.
- Buyers. Many buyers will have failed transactions
- Real Estate Industry. Large (unlicensed appraiser) companies will decide what a home is worth. Poor appraisers will flourish and the pros will decline.
This new law is the brainchild of Andrew Cuomo, the former HUD secretary. If he has ownership in appraisal companies (so rumored), he can personally benefit from having a piece of the appraisal fees from loans across the nation. Is this new law an improvement? Is a change from independent appraisers to a clearinghouse system, an improvement and better for the industry? Safeguards currently include automatic computer-based appraisals (think Zillow.com) and second appraisals (desktop, field and full). The new law basically destroys the licensing system, with the owners of the appraisal company having no requirement of licensing or proof of a criminal-free background. It seems this is a radical and dangerous change and it was not necessary.
Yhe definition of an appraisal is the amount a willing and wekk informed buyer will pay for a property on an open market. Multiple offers will determine the appraised value as it meets the definition as long as the buyer is well informed of market conditions.
A lack of governmental supervison was partly to blame for the the real estate mess. Thus background checks, education and licensing reguirements should be maintained. An appraisal should be based on the definition and there is a question as to if the current market is an “open market”. It appears to be controlled by the banks and their selected “puppet” agents. Lpcal business tradtions, customs, and protocals are ignored and terms are dictated by the banks. A buyer can not even select a local escrow company. Thus many local long term escrow companies have had to close their doors as business has been directed away from them. Currently, the real estate market is not a normal market and the new market of today is one in which real estate professionals are not on an even playing field. Its not limited to just the appraisers, but also to every aspect of the business.
I recently attended a seminar on the new HVCC, offered by a local Appraiser’s Association here in northern California. The presenter explained that the new HVCC is not actually a law. It is an agreement between Andrew Cuomo, New York’s Secretary of State, & FANNIE MAE / FREDDIE MAC.
Andrew Cuomo was on the Board of Directors of a large appraisal management company. I do not know if he has current connections to any of these companies or a current financial interest, but perhaps it is an issue that is worth looking into.
We were also told at the seminar that the agreement probably would not hold up to a court challenge. Elliot Spitzer had tried the same thing 7 or 8 years ago & it was shot down in the federal courts.
There are a number of problems with these appraisal management companies. Many of them have been started by former mortgage brokers & former appraisers, in various states, who lost their licenses due to fraud. As these sleazy individuals have now been banned from practicing their former professions, they have simply moved over to another area of the home buying industry that has no rules or licensing requirements. Any live body can start up an appraisal management company. Some states are reqiring the companies to register with the state & pay a large fee to register, but there are no rules, so anyone with the money to pay the fee can start an appraisal management company, even with a track record for fraud.
I have been an appraiser for 31 years. I have never had any claim or charge made against me for fraud / errors / ommissions. I absolutely HATE HATE HATE dealing with sleaze. If I sign up with an appraisal management company, how am I supposed to know exactly who or what I am dealing with? Am I supposed to hire a private investigator to track down the identities of the principles of all of these companies & whether or not they have lost licenses or been convicted of fraud in any of the 50 states?
I do not have the resources to do this. I would be totally in the dark about who these people are & what they have done & that is unacceptable.
Before the HVCC went into effect, I had a small number of reputable clients. I had done business with them for a long time & I had not been subjected to anything fraudulent or inappropriate, in any way, by them. I have, of course, encountered such things in the past, by others, but I did not do business with them & “weeded out” bad clients. Anyone who hopes to stay in business for the long haul, learns to do this.
With the HVCC, most of my business is gone. The HVCC does not apply to FHA appraisals or to appraisals for purposes other than lending, so that is all I have left, because I will not sign up with any appraisal management companies. I know other appraisers who are refusing to sign up with these companies. Most of them are older, experienced, reputable appraisers, who know that the HVCC has created an untenable situation for us. None of us want to end up dealing with the sleazy fraudsters lurking out there.
There are other problems with the AMC’s (appraisal management companies). They expect us to work for 1/3 to 1/2 of our former fees. Nobody reputable ever made a fortune as an appraiser, but most of us usually made a modest to fairly good living, depending on the state of the market. In tough times, we might only make +/- $20,000 per year, or less. In very good times, most appraisers I know generally made $50,000 to $75,000. We are going through a very tough time now. Imagine having an already small income cut to only 1/2 or 1/3. Who can stay in business? We can hardly cover our overhead.
In addition, the AMC’s expect us to adhere to a 24 hour turnaround time after seeing a property. This is not reasonable. After 31 years, I know I can’t guarantee to finish an appraisal report in 1 day, without knowing anything about the propety. Is it a typical tract house in a subdivision or a unusual custom built home or a country property in 160 acres, with outbuildings? I don’t have any of that information, but I am supposed to guarantee ahead of time that I can do it in 1 day! This is outlandish, but it is expected now. Ask yourself, what kind of appraiser would agree to this?
I hope that enough people begin to realize that the HVCC, which was supposed to solve one problem, has ended up creating so many other, that it is just unworkable.