The Perils of HVCC

08.06.09
By Randy Johnson

You have probably never heard of HVCC, but it is possible that you could run afoul of this newly adopted code by Fannie Mae and Freddie Mac. Its full name is the Home Valuation Code of Conduct and it has to do with the management of the ordering or appraisals for mortgage purposes. If you’re interested, you can see the Code in its entirety.  

On its surface, the Code sounds like one of the many feel-good programs that have been floated around for the past few years. The perceived problem that the Code was designed to thwart was the way in which people such as loan officers, who stood to benefit from a higher appraised value of a property, influenced appraisers’ calculations. In fact, from the standpoint of ethics, the Code doesn’t do much different than what has been required for years by the industry’s own Code of Conduct, but there are operational differences.

The main change imposed by the Code is that mortgage brokers, such as yours truly, are no longer allowed to order appraisals from appraisers we have determined to be reliable based upon years of experience. We now order the appraisal from the lender which, generally, orders it from an independent Appraisal Management Company, or AMC. Those independent companies order the report from an appraiser from the list of people they have approved.

The problems started immediately. I will repeat here only the items I know about first hand. The first issue was one of local knowledge. The first several we ordered were passed on to an appraiser who lived between 60 and 100 miles away. My belief is that no one from that far away can possibly know the important subtleties of a local market. And we did have some problems

Second, there is an issue about fees. The AMCs take from 20 percent to 33 percent of the fee paid by the borrower. Of course, most appraisers do not want to work for 25 percent to 33 percent less than they earned before, so one of two things happens.

The competent appraisers raise their minimum fee so that the borrower has to pay more. We have already seen inflation of from $50 to $75 in fees paid by borrowers. The alternative is that only appraisers with less experience will take an assignment where they have to drive 75 miles to inspect a property and then drive 75 miles back.

And of course, the final alternative is that, in spite of protestations to the contrary from the AMCs who tout their Quality Control, appraisal quality suffers.

And then we have a minor issue about seeing if the value suggested by a homeowner is realistic. In the “good old days” we could call an appraiser and ask for a “comp check.” The appraiser could do a five-minute check of recent comps that might suggest that the value was clearly not enough to do the proposed transaction. The borrower could then choose to proceed with the full appraisal or not.

Finally, I currently have a borrower who is trying to buy an 88-year-old home in Los Angeles. The appraisal report says that the “floor is uneven,” not surprising in a home of that age. He suggested that that the foundation be inspected. As you might suspect, the foundation inspector suggested that the foundation be strengthened, at a cost of $20,000 to $30,000. Is the problem really that severe? Not according to the buyer, who is prepared to fix that along with the other things they want to do with the fixer-upper.  

But in this day of “avoiding risk,” the lender wants the foundation “fixed” before they will fund the loan. The seller has no money and is being foreclosed upon. The lender can’t fix it because they don’t own the home – at least not yet. They buyer doesn’t want to fix it until he owns it. So there is a stand-off in which no one can solve this problem. The deal will almost certainly blow up and the home will go into foreclosure.

So whether you are buying a home or just want to refinance, you should understand going into the process that there is a reasonable chance that your deal may be compromised and will not be as simple as you think. There isn’t much you can do about it, but you should be prepared.

The good news is that legislation has been introduced into the House of Representatives that would force an eighteen month moratorium on HVCC. I hope it passes. So should you.

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Newly adopted Home Valuation Code of Conduct could impact home appraisal quality.