Whether they worked at a bank or with a mortgage broker, loan officers prior to mid 2009 were able to select and order appraisals from a bank approved appraiser list. This system worked quite well, as long as the lender themselves monitored which local appraisers were qualified enough to be on the list. When the mortgage crisis hit, Federal legislation (the Home Valuation Code of Conduct—HVCC) was put into effect to prevent loan officers from withholding business or payment unless the necessary appraised value was achieved.
If you have been keeping track of the other governmental changes the industry has seen over the past few months then chances are you already know where on the successful program chart the HVCC changes rank…low. If you have been reading this blog, in particular, then you may already be able to guess my opinions on this procedural complication. I have already seen at least 20% of the appraisals that come in to be horribly incorrect! It can take weeks in order to fix them, if not longer. This translates into additional delays and stresses for the home-buyers, sellers, and realtors. Clearly I could go on in my frustrations and issues with the new HVCC, but fortunately, my loan coordinator, Isaac Shalom, summed it up clearly in a recent interview.
Isaac has been on my team for over five years and we work hand in hand on all of our files together. His is our expert on appraisal evaluation, underwriting review and loan placement. Isaac works side by side with me on all of my transactions and was recently approached by a very influential trade publication, The American Banker, to discuss the appraisal issues created by the new legislation. Isaac’s tenacity in making sure every transaction proceeds smoothly is a trademark of our firm and he is one of the most respected loan officers in Brooklyn, particularly when it comes to the handling of tough files. Like me, he battles the underwriters at banks daily, protecting each and every file from possible mishandling by bank clerks.
Isaac’s analysis is so on the mark that I wanted to share it with everyone so that these issues can be fully understood. His article can be found below.
I would also like to bring your attention to the new Universal Mortgage Inc. Facebook Group Page. By becoming a fan you will not only automatically get updates from this blog but also be up to date on all of the exciting things Universal Mortgage is planning in the coming months. Please become a fan of Universal Mortgage Inc.’s Facebook page so you do not miss out, click here.
A Year On, HVCC Remains a Hot Button
American Banker | Monday, May 24, 2010
Little more than a year after the Home Valuation Code of Conduct went into effect, barring loan officers and mortgage brokers from selecting appraisers, there is near-unanimity that the rules have achieved their primary goal.
Whether that success has been worth the code’s side effects is still hotly debated.
By most accounts it is no longer possible for loan salespeople to coerce appraisers into inflating home values, a practice appraisers and housing advocates complained about for years. But critics say the HVCC has brought a raft of unintended consequences.
Loan originators complain of longer turnaround times and say their inability to communicate with appraisers has created snags in the processing of mortgage applications. Lenders are increasingly hiring appraisal management companies to dole out assignments. The appraisers complain that those companies are driving down their fees — suggesting darkly that the final effect will be to make appraisals more unreliable than they were before as experienced appraisers are pushed out of the business.
Even some who warned about the dangers of appraiser client pressure during the housing boom and supported the code early on say it has caused problems and needs fine-tuning.
“We still believe its goals are critical, but we believe the HVCC needs to be re-engineered, both from a consumer protection perspective and a safety and soundness perspective,” said David Berenbaum, chief program officer at the National Community Reinvestment Coalition, a nonprofit housing advocate.
The code was the result of negotiations throughout 2008 among New York State Attorney General Andrew Cuomo, the Federal Housing Finance Agency, Freddie Mac and Fannie Mae. The negotiations grew out of Cuomo’s investigation into whether the former Washington Mutual Inc. pressured appraisers to inflate home values.
Cuomo successfully pressed the two government-sponsored enterprises to agree not to purchase any loans from originators that did not have a process in place for ensuring the independence of appraisers. (His office did not respond to inquiries for this story.) Since the GSEs were by then among the few remaining secondary-market buyers, the code effectively applied industrywide.
Views From the Trenches
Tim Bradford, a loan officer with American Midwest Home Mortgage in Cleveland , said the turnaround time for appraisals has increased over the past year.
His company maintains a list of qualified appraisers who are selected in rotation, and when Bradford orders an appraisal, someone at American Midwest who is not involved in originating the loan assigns it.
“Sometimes, due to the randomness of the appraisals, it is slower than it had been,” he said. “I work in the general Cleveland market area. In the past, I might have had someone I liked to use for appraisals on the west side of Cleveland and someone else on the east side, because their home base of knowledge makes a difference.”
Not having that specialized knowledge costs the appraisers time, Bradford said.
“That can delay the turn time on the appraisal. They might have to travel a little farther, and because they may not be as versed in neighborhoods, they have to do a little extra research.”
The HVCC has also caused some uncertainty about the prices borrowers pay for their appraisals, Bradford said. Appraisers on his company’s list charge between $300 and $400, leaving Bradford unable to tell borrowers in advance what they will pay for an appraisal.
Isaac Shalom, a broker with Universal Mortgage in Brooklyn , N.Y. , says his dealings with appraisers have changed for the worse since the HVCC took effect — something he blames on brokers’ inability to communicate with appraisers before the appraisal begins.
“I understand that there used to be a lot of ‘negative’ guidance given to appraisers,” he said. “But now there is no guidance at all. We used to be able to prepare appraisers, and now we can’t.”
About half the property types Shalom handles in Brooklyn are co-operative buildings, which can range in size from two units to 500 units. Smaller co-ops can be difficult to finance, he said, and it is important for appraisers to understand that the comparables used in an appraisal must be truly comparable, or the bank is not going to accept the loan application.
Nevertheless, Shalom said, “I have had two appraisers in the past month use a 20-unit co-op as a comparable for two-unit co-ops.”
Much of the problem stems from unnecessarily complex lines of communication, Shalom said. “It’s one big game of broken telephone.”
With appraisal management companies employing service companies sometimes as far away as India , “the information passes through four or five people, and by the time it gets to the appraiser, important information is missing,” Shalom said. “I now get calls from people trying to set up appointments to see the properties — I’m not a realtor.”
And while many of the complaints arising from the HVCC have centered on (possibly apocryphal) tales of appraisers driving 100 miles out of their normal territory to do an appraisal in an area they are unfamiliar with, Shalom says that in New York City, pulling an appraiser only a few miles away from his normal territory can leave him out of his depth.
To a person thousands of miles away, assigning an appraisal in Brooklyn to an appraiser located in midtown Manhattan may seem like a nonissue — they are little more than two miles apart as the crow flies.
But expertise in appraising property in midtown Manhattan does not translate to expertise in Brooklyn , where understanding neighborhood dynamics is essential to accurate property value assessment, Shalom said.
“If you are looking at a property on the north slope of Park Slope in Brooklyn , you can’t cross Atlantic Avenue to get one of your comparables. It’s a completely different neighborhood,” he said.
You Get What You Pay For The code does not mandate that lenders outsource the ordering of appraisals to appraisal management companies. But as a practical matter, doing so may be easier and cheaper for a lender than building an in-house appraisal department from scratch.
Leslie Sellers, owner and principal of Leslie Sellers & Associates, an appraisal firm in Knoxville , Tenn. , said the HVCC has laid the groundwork for an inevitable degrading of the appraisal profession.
“It has been completely devastating to the industry,” said Sellers, the 2010 president of the Appraisal Institute, a trade group. “Management companies have created havoc in the industry.”
Sellers acknowledged that “the ultimate intent was independence of the appraiser, and in terms of the independence it has been successful.”
But in his view, the move to appraisal management companies has just replaced one type of bullying with another.
Appraisal management companies are typically paid a flat fee for their appraisal services, and make money on the margin between that fee and what they have to pay an appraiser. Naturally, this leads to downward pressure on appraisal prices, as AMCs look to maximize profit.
“Over a period of time, as you get cheaper and cheaper fees, the more competent appraisers who can do other work are going to do that, and you are left with the less-competent appraisers,” Sellers said.
Berenbaum at the National Community Reinvestment Coalition agreed that the code has given appraisal management companies more power in the market, and that the reduced fees they offer appraisers have caused seasoned professionals to leave the business.
“The fee is not adequate to assure the accuracy of the appraisal being done,” he said. “As a result, appraisers are being forced out of the field.”
Given the current complexity of the market, this is no time to be driving experienced appraisers out of the business, industry observers said.
“Foreclosures make up such a large percentage of properties now on the market that their values are becoming prominent, and they are being used as the comparables now,” said Robert Hyder, a mortgage market analyst in the secondary markets department at Total Mortgage Services LLC in Milford , Conn.
Experienced appraisers working in a market they are familiar with are the only ones able to give knowledgeable assessments of property values under such conditions, Hyder said.
“But talking with the loan officers I am familiar with, they are working with appraisers who are not from the area at all,” he said. “More inexperienced appraisers are doing the jobs that more experienced appraisers were, and they are traveling further and further to do their jobs.”
The appraisers and consumer activists like Berenbaum were also disappointed to learn last week that instead of funding an independent “institute” to field and review complaints about HVCC violations, as originally planned, Fannie and Freddie will do the job themselves. With the GSEs bleeding taxpayers’ money, the $24 million institute was no longer a justifiable investment, FHFA said.
The regulators and GSEs involved in the negotiation of the code say that they are pleased with the results.
In October a Freddie Mac executive told members of the Mortgage Bankers Association that Freddie’s routine procedure of checking a percentage of the appraisals on the mortgages it buys against its own valuation model demonstrated that appraisals became more accurate with the advent of the HVCC.
Alfred Pollard, general counsel for the Federal Housing Finance Agency, the regulator and conservator for Fannie and Freddie, said the code has done what it was intended to do.
“We believe the HVCC has added to the insulation of appraisers from undue influence,” he said.
The practice of separating the ordering of appraisals from the sales force “is embedded now in market practices,” Pollard said. “It is going to continue, and it is a good thing.”
Asked to respond to the complaints from appraisers and loan officers, Pollard said many of the issues facing the home valuation industry were systemic and inevitable — not a result of the HVCC.
“The major complaints we are hearing reflect problems existing in the valuation industry and the valuation process,” he said. “While the code might not be perfect, I don’t see them as problems with the code.”
Complaints that the HVCC is responsible for the increased influence of appraisal management companies are misguided, he said.
“AMCs were around before the code; that is a market development,” he said. “Banks were moving away from in-house appraisers before this code existed.”
Similarly, Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, said the complaints about the HVCC and about appraisal management companies are an overreaction to a painful change in the market — not an objective assessment of reality,
“From the lenders’ side, the HVCC seems to be working well,” he said. “There is much more scrutiny of appraisals in the past year or so, and the result has been positive. Yes it has impacted the quality — and in a good way.”
But from the appraisers’ side, Schurman said, it doesn’t seem to be working as well. First of all, he said, the HVCC fundamentally changed the business model for appraisers.
“They had built their businesses around personal relationships, and that was yanked away from them,” he said. “That is really difficult.”
It is also understandable for appraisers to complain that the prices they can command for their work are falling, Schurman said. “But the next sentence out of their mouths is, ‘It’s because of those damned AMCs.’ ”
Schurman said the decline in appraisal fees is purely market-driven.
“If you look at the volume of appraisals, it is down by almost half — so there is an oversupply of appraisers,” he said. Fees are falling not because AMCs are gouging their appraisers, he said, but “because of supply and demand.”
Schurman also took issue with the claim that veteran appraisers have quit the business, leaving less competent colleagues to do the work.
He said a survey of TAVMA members found that appraisers on the panels of member AMCs had an average of 15 years’ experience. “In order to get into an AMC panel, you have to be a pretty good appraiser in the first place.”
For now, appraisers concerned about their future have pinned their hopes on an effort to have Congress make appraisal management companies subject to regulation by state-level appraiser subcommittees.
According to Sellers, the Appraisal Institute president, 10 states have adopted model legislation proposed by the trade group for the registration and regulation of AMCs, and 20 more are considering the legislation.
Among other things, the model legislation requires AMCs to adhere to standards mandating the qualification of both the ownership of the AMC and of the appraisers on its panel.
But the heart of the model legislation is a 10-part section outlining how AMCs must set appraisal fees and requiring that AMC fee schedules be subject to the approval of the appraiser subcommittee.
“It all comes down to this: We need to move it back to where competency is the No. 1 reason for choosing an appraiser,” Sellers said.
Berenbaum’s group, an early advocate of the code, continues to support it, even though the coalition is “very troubled” by aspects of its implementation, he said.
Another shortcoming, Berenbaum said, is that the HVCC does nothing to allow appraisal professionals to act as a check to unscrupulous real estate professionals in short sales.
In a short sale, the borrower sells the home for less than is owed on the mortgage and the lender accepts a discounted payoff. This has become an increasingly popular alternative to foreclosure.
But Berenbaum said the practice of “flopping” — in which a short-sale property is sold at an artificially low price only to be resold at fair market value — is a growing problem. It is made possible, he said, because in such sales appraisers are not part of the process — the property is priced based on a “broker price opinion.”
This leaves the real estate agent issuing the opinion subject to the same sort of pressure from a buyer that the HVCC was designed to protect appraisers from — only in this case the buyer wants a property to be undervalued.
The answer to the flopping problem, Berenbaum said, would be to widen the scope of the HVCC to require that appraisers be part of all home sales, effectively removing BPOs from the equation.
Here to Stay The HVCC never relied on legislation for its effect — its power comes from the incorporation by Fannie and Freddie of appraisal independence standards in their underwriting guidelines. With both GSEs in conservatorship, and the conservator in full-throated support of the HVCC, it is a long shot that those guidelines will be changed to remove the appraiser independence.
There have been a number of stop-and-start efforts to “repeal” the HVCC through changes to federal law. Such a provision was contained in the financial reform legislation that passed the House late last year, but there isn’t one in the Senate version of the bill, which is widely believed to be the model for any final reform bill.
The HVCC itself has a formal sunset date that will take the agreement out of force later this year (after it has been in place for 18 months).
But even those who believe the HVCC has done substantial harm to the industry have no illusions about its influence disappearing after it sunsets.
“It’s not going away. No way, no how,” the Appraisal Institute’s Sellers said. “It’s embedded in the system now.”
Rob Garver , who covered regulatory issues as an American Banker reporter from 1999 to 2003, is a freelance writer in Springfield , Va.
