Implications of New Appraisal Law

Implications of HVCC
May 27, 2009



It will be interesting to see how the HVCC (Home Valuation Code of Conduct) works as a practical matter. This new law, enacted May 1, 2009, effectively places control of the entire appraisal ordering process in the hands of national appraisal management companies (AMC’s), many of which are partly owned or subsidized by the mega-banks themselves.

This new law was enacted to prevent appraisers from being coerced by brokers, agents, and others into writing appraisals for more than they believed properties were worth. While no doubt some of this “steering” took place, it is ultimately the bank funding the loan that is responsible for applying adequate appraisal review procedures on behalf of their investors. From this myopic respect, it sounds like HVCC might be a good idea, but let’s examine further.

When clients decide they want to purchase or refinance a property, they come to mortgage professionals, who then perform necessary due diligence to reasonably ascertain if a borrower would qualify for a loan based upon credit, debt-to-income calculations, and liquid assets. Only then do they rely upon the assistance of a competent local appraiser to reasonably ascertain that the necessary value range needed to successfully fund a loan is substantiated by current comps. Thus, the mortgage person and the appraiser would both do their necessary due diligence and let the client know the likelihood of obtaining a loan, before a client ever spent a penny.

Now with HVCC, appraisers and the AMC’s cannot legally give any preliminary indication of value, as this would supposedly constitute “steering.” Instead, borrowers must pay an average $500 upfront fee for an appraisal without having any indication if the appraised value will come close to meeting what is necessary to accomplish the financing. I am quite sure there are going to be a lot of unhappy prospective borrowers who are going to receive appraisal reports they can do nothing with and wonder why they even wasted their money. It also seems ludicrous that these AMC’s should be paid upfront without having to do any due diligence (I can’t think of any service industry where you get paid before doing any work)!

This is only the start. How do AMC’s determine who will ultimately do the appraisal field work? They will farm it out on a rotating basis to subcontracted appraisers in a given area, whom assumably they did some sort of pre-screening process in regards to their competency. These appraisers, who mind you are currently under extreme pressure from investors to adhere to very conservative guidelines or face monetary and/or legal repercussions, will undoubtedly often “lowball” appraisals. If you were in their shoes, wouldn’t you? It is important to remember that appraising real estate is not an exact science and there is some subjective element. This is especially true today when the volume of sales is way down from what it once was and there are often much fewer comps available. Despite this, appraisers are now asked to supply substantially more comps and backup data than they ever have before. Since it is now these AMC’s that are effectively hiring and paying these independent appraisers, why would an appraiser not always hedge on the side of conservatism in lieu of the possible repercussions that he/she could face if the loan goes bad. Taken in isolation, my guess is that this law by itself will cause values to drop another 5-10% on an aggregate basis.

Let’s go back to the question of a borrower, who has paid good money upfront for an appraisal, assuring he is going to get a professional and timely appraisal completed. I will give you an example of the appraiser whom I have used for the past 15 years (until now) and his recent experiences with an AMC. I asked what kind of due diligence the AMC did to allow him to be one of their subcontractors. He said he had to fill out an application and produce his license (no reference checks, no sample reports of his work). Voila, he was approved. My guess is that some incompetent appraisers may slip through the cracks. He is then paid $205 on reports that the AMC charges $400 to the client to produce; for almost every report he does, the AMC asks him for material additional follow-up work, which they expect him to do for no additional pay. Mind you, the person that “manages” this process at the AMC and dictates what needs to be done is located in Kansas City, KS & the appraisals are in southern California. My guess is the “manager” has far less competency than the actual appraiser. Chalk another one up for big business at the expense of the hard working appraiser actually doing the work. I feel terrible for these competent appraisers, who have in many instances built a business for decades around producing good quality work. Now, all of the sudden they have their clients pulled from underneath them and are forced to take orders from some incompetent “manager” at an AMC.

How about the question of choices for borrowers? Prior to HVCC, once a mortgage professional had an appraisal report completed, they can take that appraisal to any bank, as long as the appraiser is approved at the bank. Now with HVCC, almost every bank has a different AMC that must be used to submit loans to them. If during the process, the client is not happy with that bank’s rates, underwriting, customer service, etc. and wants to go to a different bank, they will now have to order and pay for a completely new appraisal with the new bank’s specific AMC. They are then stuck at that bank, unless they want to again pay for another appraisal report. This will severely limit borrowers’ choices.

Almost everyone in America is going to be hurt by this knee-jerk law. I have summarized below the negative consequences that will result & encourage each and every one of you to sign the STOP HVCC petition at http://www.no-hvcc.info/.

1) Borrowers forced to pay upfront for appraisal reports without having any preliminary indications of value and whether it will suffice for their financing needs.

2) HVCC in isolation will cause real estate values to drop by 5-10%, as appraisers have an incentive to be overly-conservative. This also has the spiraling effect of causing many purchase transactions to fall though, further pressuring values.

3) Borrowers will often be stuck with a randomly-chosen appraiser who is not competent to do that appraisal, both because of their general merits and the fact they may not be that familiar with a local area.

4) Borrowers’ financing choices are going to be severely limited because they will be forced to stick with one bank during the process, unless they pay for an entirely new appraisal.

5) Destruction of the entire business model for small appraisers, mortgage brokers, and real estate agents. Once again, while there were undoubtedly unsavory individuals, a vast majority of these professionals operated with integrity and do not deserve to lose their livelihood.