We are pleased to have a new guest blogger, Jonathan Steinberg, a Certified Residential Appraiser with Abelis Appraisals which provides residential appraisals throughout Massachusetts. Jon was quoted extensively in a recent Boston Globe Magazine article on the challenges of appraising residential property. Jon is here to write about the recent overhaul of the Home Valuation Code of Conduct which revamped the residential appraisal system in the U.S.
This week Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is one of the most radical overhauls and reforms to the banking industry since the days of the Great Depression. The bill will fortunately “sunset,” or put an end to, the Home Valuation Code of Conduct, an ill-advised attempt to revamp the residential real estate appraisal system back on May 1, 2009. The HVCC impacted all Freddie Mac and Fannie Mae loans and has stirred up quite a bit of controversy within the real estate industry.
A Failed Experiment: The HVCC
The HVCC essentially re-wrote how lenders order appraisals. The HVCC’s goal was to remove incentives for mortgage lenders to apply pressure on appraisers to inflate values, understanding that lenders and mortgage brokers normally only get paid if a loan closes. No longer could lenders choose from their own roster of local appraisers who knew the local real estate market. Instead, the HVCC prohibited mortgage brokers from even communicating directly with appraisers, and required that appraisals be ordered through an independent Appraisal Management Company, or AMCs.
One of the biggest complaints of the HVCC and the Appraisal Management Companies is that local, reliable appraisers who had built relationships and business with mortgage companies at reasonable fees were suddenly shut out, and the new AMC appraisers frequently lacked the competency and knowledge of local markets. How could an appraiser from Burlington, Vermont come down to Winchester, MA and effectively appraise a home? Furthermore, while the HVCC may have succeeded at eliminating pressure to inflate appraised values, the common result was that an AMC could now set the market for the fees paid to the appraisers. The AMC profits by distributing appraisals who accept the lowest fees. Additionally, if for some reason the loan doesn’t go through with the first lender, consumers had to get a brand new appraisal for each lender, adding more time, and of course more cost, to the process. A further glaring conflict is that the largest national lenders have significant interest in their own, appraisal management companies. The lenders have created a profit center through the appraisal fee by passing on as little of the appraisal fee to the actual appraiser as possible.
What Remains Of The HVCC
Even with the passage of the financial overhaul bill, some of the HVCC’s skeleton remains. The new regulations still requires lenders to order appraisals and will have AMCs be prevalent in the process. Lenders can maintain their interest in appraisal management companies, however, appraisers must now be paid a fee that is “customary and reasonable” for that market area. Whatever that means. For the homeowner, appraisals should become more portable; the new rules are supposed to ensure the portability of the appraisal report between lenders or mortgage brokerage services for consumer credit transactions secured by a lien on the principal dwelling of the consumer. The to-be-created Consumer Financial Protection Agency will have the authority to protect the consumer and assure “appraisal independence” through the issuance of new appraisal rules within 60-90 days from the date of the legislation’s enactment. The HVCC is to sunset at the time the new rules go into effect.
Many questions remain however. How will these new rules look and how they will affect this industry? Will they create transparency so the appraisal fee reflects the fee paid to the appraiser and the fee paid to the appraisal management company is itemized on the HUD-1 Settlement Statement? Will borrowers be protected by ensuring that the appraisals are not simply awarded to the lowest bidder with the fastest turn around time, regardless of competency? Only time will tell.
Thanks Jon for the great insight. And thanks to Patrick Maddigan, Esq. of TitleHub for assistance with this post.