HVCC and Their Close Relative, the Large Banks

The Home Valuation Code of Conduct continues to be a hot topic in real estate across the country.  In case you haven’t heard, the Home Valuation Code of Conduct (HVCC) was enacted May 1, 2009 for all conventional, single-family 1-4 unit loans that will be sold to Fannie Mae or Freddie Mac.   HVCC is meant to curb undue pressure on appraisers from lenders and real estate practitioners to over value properties and to help ensure independent, objective evaluations from uninterested appraisers.  The new HVCC rules prohibit mortgage brokers and real estate brokers from directly ordering appraisals and it requires lenders to have some sort of separation between loan production staff and appraisers.  Large appraisal management companies (AMCs) have thrived under the new HVCC rules, but is this an example of survival of the fittest or creating another incestrial relationship between large banks and the appraisal process?  Has HVCC created better appraisals from the most capable appraisers?  It looks like the answer is no. 

One problem with HVCC is that it does encourage the use of AMCs, appraisal management companies.  What could be wrong with an AMC?  Well, for starters the appraisers that are members of AMCs must pay a referral fee to the AMC for the appraisal assignment.  Buyers are usually charged $250-$450 for a standard appraisal.  AMC appraisers are typically only paid 40% of this appraisal fee.  The rest of the money goes to the AMC.  Everyone knows the old adage; you get what you paid for.  If an employee only makes 40% of what they would normally get paid for the same amount of work, do you think they would work at the same level as before?  Probably not.  And, that may not be a deliberate consequence of the lower pay.  If an appraiser is only making 40% of what they used to make per appraisal, the appraiser would have to take on more work to keep their income level the same.  The more work you take on, the less likely the work will be performed at the same level.  It’s a vicious cycle.

So, now we have appraisers who are strained financially and are having to take on more appraisals than time allows.  The increased need for more assigned appraisals adds another factor to the equation.  The hungrier you are, the farther you are willing to go to hunt for food as resources dry up in your immediate area.  Appraisers are going outside their area of practice to compensate for the decrease in income.  Much like real estate licensees, appraisers are only supposed to appraise property in areas that they clear understanding of the geographic area and market that the subject property is located in.  Many real estate agents have logged complaints with the National Association of REALTORS® that they are seeing appraisers crossing into neighboring states to evaluate homes.  This can cause huge problems in a transaction.  Can a Baltimore, Maryland appraiser truly have a clear understanding of the market in Fredericksburg City, Virginia?  I find it highly unlikely.  There is nothing in HVCC that says the appraiser must be licensed in the state the subject property is located in.  This is crazy talk!  As a REALTOR® licensed in Virginia I am not allowed to sell property in Tennessee just because I am in need of additional income.  No, I need to get my Tennessee real estate license. 

Another huge problem with HVCC is who owns the AMCs.  Not all the surprising, the big banks own, or have ownership interest in, most of the big AMCs.  If Wells Fargo, Citibank, and JP Morgan Chase are sending their appraisal requests to the AMCs they have an ownership interest in, they most likely have more control over the appraisal process and this act does not allow for an atmosphere of independence that HVCC is supposed to create.  In fact, this practice could continue to harbor the back handedness of the market we are trying desperately to recover from.  The HVCC document contradicts itself when it comes to this issue.  On one page it states that the lender should not use an appraiser that has any affiliation whatsoever with the lending institution or a company the lending institution has an affiliation with.  On the next page HVCC lists conditions that would allow the use of an appraiser that would have been eliminated by the aforementioned rule.  The only thing clear about this portion of the document is that the creators of HVCC are talking out of both sides of their mouths.  I believe most consumers would have a problem working with a REALTOR® who only allows their clients to use a lender, home inspector, and settlement agent that is related to the REALTOR®.  Consumers and lawmakers have come to expect unbiased referrals and relationships from the real estate industry.  Why is the appraisal industry being held to a different standard? 

In the vein in which HVCC was created, it is a good idea.  However, in practice it is horribly flawed in its current form.  Just when the real estate industry was beginning to turn the corner toward recovery, appraisal rules are introduced that stunt the growth of the market.  Yes, we have created a time when action needs to be taken against the activities that allowed the housing industry to collapse and take the economy with it, however, we do not need a hastily drafted and poorly executed document to be steering this fragile ship back into rough waters.

Tags: appraisal problems, HVCC, large banks