I had heard of something new coming on May 1st to the mortgage industry. I was trying to find out what it was, and I found out today. It is called the Home Valuation Code of Conduct, or HVCC for short. Do a search for either name and you will see some links explaining it, dating back to 2008.
HVCC is not a law
It is an agreement between Fannie Mae and Freddie Mac and New York's Attorney General Andrew Cuomo. Some banks have already been following the agreement although it was slated to go into action starting today (May 1, 2009).
Supposedly, it is trying to keep banks from turning to a shortlist of preferred appraisers and to use AMC's (Appraisal Management Company) instead. AMC's are like middlemen for appraisers and charge each appraiser a fee to be part of their roster.
It has been suggested that this will cause buyers to pay more for an appraisal (to cover this middleman) yet the appraisers will be earning less (up to 50% is what I read) because that's what the AMC's are offering. In other words, if you are an appraiser and want to continue to work and pay your bills and eat, you try to join up with these AMC's or you will not have any further bank appraising jobs.
So who does HVCC affect?
This will affect a buyer and seller involved in conventional mortgages, including home owners doing a refi. It does not apply to FHA or VA financing. Hmmm, maybe this will push buyers to FHA financing even if they can go conventional.
Of course, we have already stated how it will affect appraisers. Many experienced appraisers are leaving the business because of this change. Some are trying to get other appraisal business that does not involve banks (estate appraisals, divorce, bankruptcy, tax protests, etc.).
What are some key points?
- Buyers will have to pay for the appraisal up-front at the loan application. In the past, many loan officers would do some advance work on a refinance to see if it was in the home owner's best interest. Now, the home owner has to pay for the appraisal upfront, not knowing if the property will appraise or not. In today's declining market, that will cost home owners money that will not help them at all. Home buyers will be similarly affected.
- As stated above, banks will not select their own appraisers. They will go to an AMC and have the appraiser selected through this middleman.
- The appraiser will no longer have any contact with the real estate agents involved in the transaction. We wonder how that's going to work, especially if we need to be there to get them into the property.
- Because many experienced appraisers are leaving the field because of this, AMC's will be full of inexperienced appraisers taking on more work. Really, does that sound good to get accurate appraisals?
- Because of experienced appraisers leaving, as mentioned above, there are less appraisers available for more work. This is causing lag times in getting the appraisals. I'm forseeing longer closing times having to be written on contracts. Imagine a foreclosure sale where a buyer gets penalized (I've seen $100 a day) for every day needed to close after the agreed upon closing date.
- Again, because of less available appraisers, they are being asked to do appraisals in areas 2 hours away. Once again, we are losing experienced local appraisers to less experienced appraisers that might never have stepped into a particular town, area or subdivision. Accuracy?
- I've read about lack of communication between these AMC's and the appraisers which could be one of the causes for slow appraisal times.
- This agreement also requires even more paperwork which adds an extra burden to appraisers working for less pay, again a reason for slower appraisal times.
- Someone on a blog comment mentioned that Andrew Cuomo used to be an owner of an AMC. Hmmmmm. Others speculate that this agreement came up betweeen Cuomo, Fannie Mae and Freddie Mac to circumvent further investigations into Fannie and Freddie.
My opinion on HVCC
The above points were gathered from reading what others have posted. Please do your own investigations and form your own opinion. Feel free to share it with us.
I don't blame experienced appraisers leaving the business, or moving out of the banking portion of it. I realize we all need to deal with the financial mess we're in, but how many of us wish to work harder for less money? With this recession, most real estate agents are doing just that. But that is a product of the recession we're in, not because our industry is forcing new regulations on us - yet. And, of course, this will affect us, too. I love my job (I've been doing it for 26 years in other recessions and have seen many ups and downs). But I've never witnessed anything like what is currently happening.
I can understand that some banks/mortgage brokers asked some appraisers to "make the appraisal work." And some of that is what caused the overinflated prices we experienced in the past. As a REALTOR with so many years of experience, I knew those prices could not last. My jaw dropped as prices kept escalating and there was a buying frenzy. Yes, there was a frenzy when prices were high, and now there is a real slowdown when prices (and interest rates) are low.
I have never tried to influence an appraiser. I want them to do their job and do it correctly. If a seller, whether it is mine or I am representing a buyer, is priced too high and the buyer agreed on that price, it is up to the bank to protect their investment. I'm all for appraising a property at the correct price. If a deal falls apart because of a correct appraisal, so be it. Hopefully, the seller learned a lesson (and in some cases the agent had no idea, either).
But if we're all going to be dealing with inexperienced and out-of-area appraisers, how is that helping anyone? Some have written that an out-of-area appraiser gave a high price. In my experience, I've had a few properties that I was told appraised out higher than the contract price. But in every case it was $5,000 or less, not enough to hurt or benefit anyone unfairly. Remember, the recorded sale price was what the property actually sold and closed for, not the appraised value.
What really hurts is a home worth, say $200,000 that appraises for $170,000 because of an inexperienced and/or an out-of-town appraiser. This can cause a lot of problems. It can steal away true seller equity, hurting the seller. It can cause a buyer to not be able to get the financing on a home they loved, a home that should have appraised out. It can hurt the relationship formed between a seller and or buyer and their real estate agent and loan officer (clients thinking that we should have known this would happen). And it hurts the entire area by bringing prices down unfairly.
I have read that there is a process to protest a low appraisal and I've got more studying to do to find out how that works. I have tried educating my sellers about appraisal changes for some time - many don't want to believe me.
Unless I see ridiculous appraisals come out of this I will accept the new agreement. My real worry is the extended appraisal time. I heard of a sale where the appraisal took 40 days! Imagine, you waited 40 days to get the appraisal and you find out the home did not appraise. Negotiations begin, again. Maybe the seller refuses to sell that low and takes the chance to start over again or takes the property off the market.
Now you have a buyer that had plans to move soon. Maybe their lease is ending, or they wanted their children in their new school at the start of the next school season.
What if the seller is contingent on sale (COS) or close (COC) on another property? We might be seeing the worst domino effects happening than ever before, which will make less sellers accept any kind of contingent to sell or close. With today's market, less sellers are accepting COS but this might also affect COC, a contingency that was usually happily accepted.
Only time will tell whether these worst case scenarios will transpire. From what I've read, it already is since some banks and mortgage brokers have been trying it out before May 1st.
I currently have a very nice Orland Park home for sale that was difficult to comp out to begin with as there isn't anything quite like it out there right now. In fact, this could affect any listing on the market. I read about a listing where the agent felt it was underpriced still not appraising! And we thought our declining prices were due to short sales and foreclosures? Add another factor and I don't know when we'll hit bottom.