Appraisal Scope

Over the past week, we have been talking with our clients about the impact of the HVCC and changes we will likely have to make as of January 1, if the HVCC is agreed upon as it currently stands.  What has surprised us most about our conversations is that this monumental agreement is little known or understood by our clients.

At the same time, we had been discussing the need for a blog section to our website.  Since there is nothing as controversial to our industry right now, it seems like the perfect first topic to launch our blog.

So What is the HVCC?

The HVCC is an acronym and stands for Home Value Code of Conduct and stems from an investigation in New York by Attorney General Andrew Cuomo into the appraisal practices of both Fannie Mae and Freddie Mac.  While we don't profess to know all of the ins and outs of why the investigation began and what was determined, we have read the agreement that Fannie, Freddie, and the Office of Federal Housing Enterprise Oversight (OFHEO) plan to adopt.  Thus any lender or broker who does business with Freddie or Fannie would also be bound to the agreement...which pretty much means all of us.

This agreement is the HVCC and while some of the components are no-brainers and others are already in practice, there are other parts of the agreement that will dramatically affect appraisers, lenders, brokers, and consumers.  There are some fantastic editorials available as to the pros and cons of the HVCC, to which we would highly recommend taking the time to review:

Under the Radar:How the HVCC May Negatively Affect and Change Real Estate as We Know It

Wall Street Journal:  Home-Appraisal Code May End Up in Court

(HVCC) Home Value Code Of Conduct And The End Of The Independant Appraiser

What does it say?

The current version of this agreement which seems to become defacto federal law is available at the NY Attorney General's website:

http://www.oag.state.ny.us/bureaus/Mortgage_Fraud/agreements.html

and at Freddie Mac:

http://www.freddiemac.com/singlefamily/docs/030308_valuationcodeofconduct.pdf

What will change if it is not challenged?

• Brokers may not choose appraisers to be used for loans and may not engage in any communication with appraisers. Issues of timeliness, professionalism, knowledge of the area or type of property cannot be addressed by the broker.  Long standing relationships are a moot issue.
• Brokers may not provide an estimate value or loan amount, or request any information prior to the completion of the appraisal report (i.e. no comp checks or value estimates!) 
• All appraisals must be made in the lender’s name; if the broker chooses a new lender for the deal, a completely new appraisal will need to be ordered (once again with no control over the appraiser to which it is assigned). Time and money are lost; the consumer suffers.
• Appraisers are not allowed to talk to their clients, a restriction not placed on any other industry to which we are aware.  Clarifying questions cannot be made or asked.
• Appraisers must join AMCs (appraisal management companies) which often take 40% of the fee for themselves which will ultimately force the most qualified and experienced appraisers from the business.  AMCs often focus their work to appraisers who are fast and cheap rather than detailed or knowledgeable.
• Appraisers have additional regulations, but other valuation systems such as the highly inefficient AVMs (Automated Valuation Models) do not.  Lenders are free to use AVMs with limited regulation.  In an area such as the Bay Area where homes are diverse within the same block, these models are extremely ineffective at delivering a true market value as they work best in track-home neighborhoods where homes have few differences.

It seemed to be a done deal...

Of course, there has been a significant lobby to Congress about how this agreement not only negatively impacts consumers, but also interferes with the federal government's role (specifically the new Federal Housing Finance Agency) in regulating federally regulated institutions.  But it seemed to be falling on deaf ears until Senator Elizabeth Dole questioned Federal Reserve Chairman Ben Bernanke in mid-July at a hearing of the Senate Subcommittee on Banking. 

It is with great relief that we read this letter from Vice Chair Donald Kohn of the Federal Reserve to Senator Dole.  The comments made in the letter give us a first glimmer of hope that the HVCC may be challenged by federal agencies and/or Congress. 

View Letter

What can be done?

Now is the time to act.  Members of the Fed and the Senate are beginning to recognize that the HVCC should at the very least be federally developed.  PLEASE take the time to read about this agreement and contact your Senator or Congress person.  This agreement does not focus on the real issues related to the housing crisis which relate to (in our opinion) poor underwriting decisions and in the end will only create additional costs to consumers while banks and AMCs increase their profit margins.

Here is a link to find and contact elected officials in your area.  Please take the time to email them your stance on this crucial topic:

http://www.usa.gov/Contact/Elected.shtml

Note:  The facts and opinions presented in this blog are based upon the research gathered from the links above as well as from comments made in AppraisalPress, which was not referenced above...just want to give credit where credit is due!