HVCC and My Worries About The Appraisal

For those of you that are new to real estate investing or haven’t sold a house since May 1, 2009, there are new regulations in place that adversely affect real estate appraisals.

The reason this affects just about everyone, whether you are a buyer or a seller is because most houses that are sold will be purchased with a loan that will eventually be sold to Fannie Mae or Freddie Mac. Apparently, the New York State Attorney General, Andrew Cuomo’s office, was investigating Fannie Mae and Freddie Mac for appraisal coercion and Cuomo’s office agreed to stop the investigation if the mortgage giants would follow a new code of conduct. That code is call the Home Valuation Code of Conduct or HVCC and went into effect on May 1, 2009.

In doing my research for this post, I mostly found lenders, mortgage brokers, and real estate agents telling their nightmarish stories about dealing with the new regulations. I didn’t find any home buyer’s or seller’s but I’m sure there are many because with every story from a real estate professional, there was always a buyer and a seller.

According to what I’ve read, any lender who plans to sell their mortgage to Fannie Mae or Freddie Mac must use the HVCC for their appraisal because these organizations must follow the rules and will not buy mortgages where the HVCC was not followed. The HVCC dictates that lenders cannot have contact with appraisers but instead must use an intermediary. This means they must set-up a separate department in their organization to handle the ordering of appraisals or use an ‘Appraisal Management Company’ (AMC) to order appraisals. These AMCs are (1) not regulated, (2) can be owned by the lender, and (3) work for profit.

What’s happening?

Since AMCs are not regulated, who’s to say they are not pressuring appraisers to ‘turn-in’ a certain value? What’s to stop the AMC from doing ‘under the table’ deals? At least appraisers are licensed and can face serious fines and even lose their license if found to be unscrupulous.
AMCs can be (and are) owned by the lender. There is a huge incentive for the AMC to act on behalf of the lender. How does that solve the original problem? Hmmm..you got me?
AMCs are ‘for profit’ companies. Now you have another layer in the appraisal process and who’s going to pay for it? You got it, YOU WILL, and not only you, also experienced appraiser will pay. From my reading, the only two things an AMC is concerned with is ‘how fast can the appraisal be done’ and ‘how cheap it is’. The cheapest wins. Because experienced appraisers who are intimately knowledgeable about local communities are refusing to work for so little, there are not as many appraisers to call. AMCs are pulling appraisers from locations far away from the community where the appraisal needs to be done. And many are new to the industry and very inexperienced to boot. Because these appraisers are working for peanuts, hurried to get the work done, and not familiar with the area, details are skipped. And since they are also scared to turn-in appraisals that may appear over-valued, they are using mid-range comps and including foreclosures in the comps.

How does this affect the homeowner or buyer (investor)?

Well, if you’re a seller and your appraisal comes in low, do you really want to sell your house for less than it’s worth? If you’re a buyer and the appraisal comes in low, will you be able to get the financing you need if the seller won’t lower their price? What happens? No sell, that’s what happens.

Homeowners are opting to stay in their houses and buyers are forced to continue to rent. Now, tell me, how’s that helping the economy? It just seems to me that every time ‘government’ gets involved in business, it just screws everything up. Wasn’t it government’s involvement that started the whole sub-prime mess to begin with? Look it…yeah, they’re the reason.

What about investors, how does it affect us?

Financing. That’s how it affects us. My financing needs to be right in order for the numbers to work. If I can’t finance as much as I thought because the appraisal comes in low (a lender will only finance a certain percentage of the appraised value), then more money has to come out of my pocket. Since I’m not in a position where I have unlimited funds, it could totally blow a deal out of the water for me and waste the time of everyone that was involved.

Because I want to cultivate good relationships with the professionals I’m working with because I need these people to find properties, I don’t want to back out of deals. Like I said, it’s a waste of time for everyone. On the other hand, I don’t want to go into a deal where the numbers don’t work either, and quite often, you don’t know that until after the offer is made and accepted. It’s a catch and worries me a lot when I’m evaluating a deal. Because the appraisal is such an unknown factor, it’s really hard to know whether or not to move forward on a deal and that’s a problem. The HVCC is causing me to hesitate and it shouldn’t, comps should be comps and I should be able to make a close assessment without worrying that an appraiser from out of the area with no knowledge is under-appraising the subject property.

There is a House Bill (HR 3044) that has been introduced to congress and assigned to the House Financial Services committee that will place an 18 month moratorium on HVCC. If you’re a real estate investor, a home seller, or a home buyer, and you think this HVCC could adversely affect you, please let your congressman know that you would like him or her to support this bill. Here’s a link to help you find your congressman:

https://writerep.house.gov/writerep/welcome.shtml

Here are some links to interesting information about HVCC:

Realtor Magazine

Arlington, TX Real Estate Blog

The Examiner-Tulsa

A Realtor in Virginia

Appraisal Press

Until next time…

Reba