Many of you have probably never heard of the Home Valuation Code of Conduct (HVCC) but if you are buying or selling a home you may encounter appraisal problems due to this change in appraisal standards.
On Thursday The National Association of Realtors chief Economist Lawrence Yun released the following statement:
"In the past month, we have suddenly been bombarded with many stories of, at the last moment, transactions falling apart because appraisals are coming in unrealistically low. As a result it opens up a new round of negotiations between a buyer and a seller or in many cases the buyer just steps away."
The HVCC went into effect at the beginning of May as a result of a lawsuit by New York State Attorney General Andrew Cuomo against Washington Mutual, Fannie Mae and Freddie Mac agreeing not to buy any loans that did not comply with the code. Since Fannie and Freddie are the largest purchasers of loans, the rest of the lending industry had no choice that to go along.
The HVCC creates a firewall between lenders/brokers and appraisers. This is supposed to keep lenders and brokers from putting pressure on appraisers to meet a certain value. Lenders are no longer able to pick up the phone and call an appraiser that they know does quality work. The appraisal work must be assigned on a rotating basis by someone who is not the loan officer.
Most lenders have turned to appraisal management companies. Appraisers sign up with these companies and give them a list of zip codes the appraiser will accept assignments in. When the appraisal management company gets an order from a lender, they send out a blast e-mail to all the appraisers that have signed up for the zip code of the property. The first appraiser that accepts the assignment gets the job.
There are several problems with this approach. The appraisal fees are now being shared between the appraiser and the appraisal management company. The appraiser is getting about half the fee he uses to get. This means that the appraiser has to do twice as much work to earn the same money and in order to get the jobs, he is forced by the system to sign up for more and more zip codes for the chance of a job.
The National Association of Realtors is reporting that Realtors are telling them horror stories of appraisers not knowing the local market, doing appraisals that use computer models that often incorporate sales that are not comparable, of not knowing that the home had extensive renovations or additions and even reports of appraisers not having access to the local MLS. I have no idea of how these appraisers are getting their sales information.
In order to compete and get jobs in this new environment, appraisers have to cut corners and this does not help either the buyer or the seller. The really good appraiser is not opting into this system.
The HVCC was designed to take fraud out of the appraisal process but it is looking like we have thrown the baby out with the bath water.
