On May 1, 2009, the Home Valuation Code of Conduct, a new set of rules governing home appraisals, went into effect. Its purpose was to protect consumers by insulating appraisers form outside influences that could pressure the appraiser into inflating home values.
But the result of the HVCC has been to harm consumers rather than protect them. Consumers are now paying more for an appraisal, waiting longer to receive it, and are often getting a less accurate appraisal after the wait. Some people in the mortgage and appraisal industries say the pendulum has swung too far, citing cases where appraisers are being sued for undervaluing properties.
How did this happen?
In 2007, New York Attorney General Andrew Cuomo began an investigation into now-defunct Washington Mutual Bank’s relationship with eAppraiselT, a subsidiary of title company First American Corporation. Cuomo alleged that WaMu essentially blackmailed eAppraiselT by threatening to take its appraisal business away if the appraising firm didn’t pump up appraisal values so that WaMu loan officers could collect high commissions on the subprime loans it underwrote. WaMu’s reckless subprime practices are what drove the banking giant into bankruptcy.
Cuomo, a Secretary of Housing and Urban Development in the Clinton Administration, filed a lawsuit against eAppraiselT and First American Corporation late in 2007. Then, in March 2008, Cuomo closed his investigation in exchange for getting the Federal Housing Financing Agency, Fannie Mae and Freddie Mac to agree to the Home Valuation Code of Conduct.
The HVCC imposes limitations on the persons or entities who are allowed to order appraisals and on direct communications with the appraiser. In theory this should help the consumer. However, in practice it is having some very negative consequences.
In order to facilitate relations with appraisers, mortgage lenders have adopted a policy of using Appraisal Management Companies. By relying on AMCs, whose primary focus is on price and turnaround time and not on experience, HVCC has hurt the consumer by lessening the accuracy of the appraisal product they receive. The system encourages even experienced appraisers to lower their standards.
The average consumer has been hurt. Before, when you wanted to refinance your home you could go to a mortgage broker and apply for a loan. The broker could order an appraisal and shop around for the best rate on your behalf. If a lender could not make a loan at a favorable rate, the broker could use the same appraisal and submit the loan to another lender.
Now the mortgage broker is not allowed to order the appraisal. Instead, an appraisal management company does that. That appraisal is done for only one lender, so if that lender is not able to offer a loan with favorable rate and terms, the consumer will have to pay for another appraisal ordered by yet another nationwide middleman aligned with another big lender.
In addition, while some of local appraisers are signed up with some of AMCs, your right to choose your service provider has been taken away. The AMCs typically sign up a handful of appraisers in a region and rotate who they order the appraisals from. This is “socialized appraising” and violates free trade for the appraiser because it lumps all appraisers in a pool. Instead of engaging an appraiser who specializes in a specific type of property, you get the next appraiser on the list. It could be the veteran local appraiser with decades of experience or it could be someone from out of state who just obtained a Colorado license.
The result of HVCC, however well-intended it was, is that the quality and accuracy of appraisal has been seriously compromised while the cost of getting a loan is higher, not only because borrowers may have to pay for multiple appraisals, but also because the AMCs charge fees on top of the fee received by the appraiser.
“The minimum increase we have seen in direct consumer cost is $150 per appraisal,” says the National Association of Mortgage Brokers. “That, coupled with the drastically increased appraisal turnaround times that impose extended lock periods at an average expense of $561.95 per loan, is now costing consumers an estimated additional $711.95 per transaction.”