It’s the hottest topic in real estate today: The Home Valuation Code of Conduct, or HVCC, is so hot that it’s not just inflammatory. It’s on fire.
The HVCC is a new set of appraisal-related practices that lenders must follow with respect to loans they want to sell to Fannie Mae or Freddie Mac. These new practices are intended to reduce the incidence of appraisal fraud and prevent inappropriate pressure being placed on appraisers to inflate home valuations in home purchase and loan refinance transactions.
Mortgage brokers, appraisers and real estate agents are up in arms over the HVCC. They’ve ranted on blogs, called their congressional representatives, written letters to the editor, signed online petitions and more. They want these rules to be stopped, undone, reversed, blocked, prohibited, banned, tossed out, "moratoriumed" or whatever other word might fit. At the very least, they’d like Congress to delay implementation of the HVCC until they can find an effective way to eviscerate it.
Appraisers are especially upset because the HVCC has changed the structure of their business. Rather than having independent relationships with loan officers, mortgage brokers and real estate agents, they’re forced to do business through appraisal management companies. These companies have so much market power that they have raised the prices borrowers pay for appraisals and cut the fees they pay appraisers to do the work. Appraisals now take longer to be completed and are more costly and less portable from one lender to another.
It’s important to understand that the HVCC is new, and like any bleeding-edge technology added to a legacy system, it suffers from an unfortunate tendency to crash the whole works. But the fact that the HVCC isn’t perfect doesn’t mean the problem it was supposed to solve wasn’t serious.
Appraisals are performed to meet the needs of lenders, and while home sellers may not object to an inflated valuation of their own home at the time of sale, homebuyers, who foot the bill for the appraisal, may have a much different take on the matter.
The issue is more complicated still for homeowners who want to refinance or cash out equity. They may indeed welcome an inflated valuation at the time, but once they’ve spent the cash, they may be much less sanguine about indebtedness that exceeds the true value of their home. …CONTINUED
Inflated home valuations are also problematic for homeowners because they contribute to house-price bubbles and higher property taxes. It’s generally acknowledged in the industry that appraisal standards were loosened when house prices were on the rise and that intense and pervasive pressures on appraisers to "hit" a certain number (read: the sales price of the home) so the buyer’s lender would approve the loan were one cause of the current severe housing boom-and-bust cycle.
Homeowners need reliable data about home values to make smart decisions about their ownership of their home. Without competent appraisals (or accurate online valuations — a subject for another day), homeowners can’t rationally figure out whether to buy, sell, refinance or borrow against their equity. How much better off would homeowners be today if conservative appraisals had been the norm five years ago?
The hard truth is that the modern appraisal has become a problem because of undue pressure on appraisers and the fact that lenders hardly care whether the collateral is sufficient since they sell most of the loans to investors. But while the HVCC is far from perfect, it shouldn’t be scrapped without an alternative means to fix the original problem of inflated valuations.
Rather than write any more rants about the HVCC’s ill effects, those who don’t like the rules should propose some specific ways that the HVCC could be improved and still further the objective of shutting down the hit-the-number school of appraisals (and it should be noted that industry groups are active in pursuing change: see story).
Yes, appraisers should be knowledgeable about the local area. And yes, they should be fairly compensated for their services. And yes, appraisal management companies, which now operate in an unfortunate regulatory free zone, should be subject to more government oversight. And indeed, a way should be found to overcome the disconnected blind-faith position of the investors who buy the loans.
But what’s needed is not a return to the good ol’ pre-HVCC days of Wild West appraisals. What’s needed is reasonable rules that make sense and that protect homeowners’ interests.
Marcie Geffner is a veteran real estate reporter and former managing editor of Inman News. Her news stories, feature articles and columns about home buying, home selling, homeownership and mortgage financing have been published by a long list of real estate Web sites and newspapers. "House Keys," a weekly column about homeownership, is syndicated in print and on the Web by Inman News. Readers are cordially invited to "friend" the author on Facebook.
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