The Modern Revolution of Real Estate Appraisal

The Modern Revolution of Real Estate Appraisal

The HVCC

The Home Valuation Code of Conduct (HVCC) is a code of conduct that is intended to provide consumer protection from fraudulent or cohered appraisal values by separating the loan production staff from the appraisal ordering function. The code is required on all mortgages being sold to either Fannie Mae or Freddie Mac (government sponsored entities or GSE’s). It is safe to assume however that the code will be adopted as general practice for all loans as many underwriting guidelines established by Fannie and Freddie in the past have become standard procedure. The code is scheduled to be implemented on May 1, 2009; however, legal delays are still eminent.

Background:

The code stems from a lawsuit that is currently pending between the New York Attorney General and eAppraiseIT (an Appraisal Management Company or AMC) and their largest client at the time Washington Mutual. The complaint alleges that the loan production staff at WAMU hand-picked appraisers who were able to bring-in the appraisal value to make loans. The attorney general found enough evidence to determine that industry participants pressure appraisers to value homes at predetermined and possibly inflated values in many more instances than with just the WAMU case. This pressure came in the form of threatening to withhold future business, by threatening to take an appraiser off an approved list and by withholding payment. An agreement was made with the GSE’s and OFEHO to implement the HVCC and after one comment period the code has been finalized.

Negative Implications of the HVCC:

The HVCC will essentially drive all appraisal business to AMC type companies. These companies will generally charge a higher fee for the appraisal than if it were contracted directly with an appraisal firm and will only pay the appraiser a fee split ranging from 25% to 90%. If the fee is $350 for an appraisal the appraiser may actually only be paid $175 while the AMC collects the rest of the fee for placing the order, maintaining the client relationship and often doing a QC check of the appraisal report of which requires only a fraction of the cost incurred by a typical appraisal office to produce an appraisal.

While the cost of living is going up around the country appraisal fees are being driven down by supply and demand and by AMC’s that offer to pay the smallest fee splits by having the largest pools of business. The AMC’s that will thrive are the ones that can pay the appraiser’s the least and in turn use their profits to generate more business, buy-out competition and take a stronger stand in the market place. Without regulation of AMC’s the free market may result in larger management companies and smaller appraisal fees due to supply and demand forces. The most highly trained appraiser’s often refuse to work for fees that barely cover overhead. These appraisers often spend twice as much time on reports to assure that all of the necessary data, analysis and conclusions are made in a report rather than a set of canned comments.

Furthermore, the HVCC will effectively dismantle client relationships that have been forged over the years. These client relationships have often come at a price and provide value to a company (take your client rolodex and cut it in half, is your company still as valuable as it was?). Old clients will turn to AMC’s and when appraiser’s attempt to sign up for an AMC they will likely hear, “sorry our list is full”.

Positive Implications of the HVCC:

The HVCC will help return the word “art” to the definition of appraisal more prominently and restore some lost consumer confidence along the way. Appraisers will no longer have estimates of value in the appraisal request and will not have anyone calling with threats.

What you need to know:

Compliance with the code is not required for non-GSE mortgages including FHA or Jumbo assignments. We recommend that you hire an appraiser that best knows the market and can thoroughly analyze data relevant to that market.

For non-GSE assignments or other assignment types get to know your appraiser. Find out what tools the appraiser uses to research market trends. Ask questions like what type of networking do you participate in to learn the latest market trends, have you appraised properties in this geographical area, or have you appraised this property type before.

Bottom line is to hire experience.

Other Solutions:

A hotline is a great concept to report misconduct and could be the primary emphasis rather than a mandate for AMC use.

A Uniform Residential Appraisal Request Form (for residential assignments only) that is required to be included in each appraisal.

It will become our company policy to include a copy of the engagement letter with all appraisal reports after the implementation of the code. This process will provide evidence that the engagement letter does not contain any violations of the code of conduct.

Other Resources:

HVCC Revised (showing all of the old and new comments)

Fannie Mae FAQ

Freddie Mac FAQ

Harney HVCC Washington Post Article

About Us

Nicholas D. Pilz is the owner and senior appraiser of Appraisal & Consultant Services, Inc. He has 8 years of experience in residential appraisal primarily in the Orlando Metro area including Orange, Lake, Seminole, Osceola, Polk, Brevard and Volusia counties. Prior to appraising Nicholas worked in real estate sales and as a foreman building houses. Nicholas currently serves as the chair of the Government Relations Committee for the East Florida Chapter of the Appraisal Institute and as the vice-chair of the HVCC committee. Appraisal & Consultant Services, Inc. utilizes unique tools in the field and behind the desk to provide our clients with optimal data for making decisions in difficult markets. Please feel free to contact us at acsinc@acsappraisers.com or at 407-737-1008 for more information.