How the Home Valuation Code of Conduct Affects Home Appraisals
Question: Will the Home Valuation Code of Conduct Affect the Appraisal of My Home?
A reader asks: "I am totally confused. I heard that some new rules are in effect for appraisals, but what I find online is a bunch of loan guys complaining about it. What gives? Sounds to me like our appraisal procedures protects the public. I'm putting my home up for sale next week. Will the Home Valuation Code of Conduct affect the appraisal of my home?"
Answer: You're not alone in your confusion about appraisals. On the surface, the Home Valuation Code of Conduct, known as HVCC, sounds like a good idea. The revised appraisal process affects a lot of home owners. Morever, it could possibly result in a low appraisal on your home.
The New York State Attorney General Andrew Cuomo in 2007 filed a lawsuit against eAppraisalIT and its parent, First American, for caving in to Washington Mutual, which allegedly pressured appraisers to submit so-called inflated appraisals.
As a result of the lawsuit, Fannie Mae and Freddie Mac, the largest purchasers of home mortgage loans in the United States, elected to adopt the Home Valuation Code of Conduct. All conventional lenders who sell mortgages to Fannie Mae or Freddie Mac must now follow the Home Valuation Code of Conduct. It affects FHA loans from February 15, 2010 and forward, and the process itself is continually updated.
What is the Home Valuation Code of Conduct?
The rules of the HVCC say that individual banks and mortgage brokers who sell conventional loans in the secondary market to Fannie Mae and Freddie Mac cannot hand-select their own appraisers anymore. They must let an appraisal management company pluck an appraiser from its pool of appraisers to do an appraisal.
The HVCC rules are meant to stop collusion between lending institutions and appraisers. However well meaning, the Home Valuation Code of Conduct, according to many professionals in the real estate business, has backfired.
In an attempt to thwart inflated home values, which constituted a small portion of the appraisal market, the HVCC initially caused chaos, according to critics, and messed up the entire appraisal process for many conventional borrowers. It's better today.
What is Wrong With the Home Valuation Code of Conduct?
I can tell you what happens in the Sacramento market, which I'm fairly confident is echoed in almost every other real estate market in the country.
- Out-of-Area Appraisers Are Performing Appraisals.
My Sacramento buyers paid an appraiser from Stockton, a city located 45 minutes away from Sacramento, to do an appraisal in a city where the appraiser neither lives nor works. Another property was appraised by an appraiser from Las Vegas, Nevada. If an appraiser is licensed to work in an area, they can work in that neighborhood, even without experience.
- Appraisers With Less Experience Are Performing Appraisals.
Because appraisers are selected at random from a pool of all licensed appraisers, a borrower could end up with a fairly new appraiser. In California, an appraiser can obtain a residential license to appraise a single family home worth up to $1 million. The requirements are 150 hours of education and 2,000 hours on the job within a 12-month period, according to the California Office of Real Estate Appraisers.
- Experienced Appraisers Are Going Out of Business.
The thing about experienced appraisers is they have most likely been inside the homes in the neighborhoods where they are asked to appraise. They know why a home on one side of a physical boundary may have a higher market value than a home on the other side. They count on repeat business. When that source of business dries up, they have no job and their expertise is worthless.
- Transactions Can Fall Apart When Bad Appraisals Are Too Low.
Appraisers who don't know the neighborhood or have little experience are far more likely to produce an under-valued appraisal. When an appraisal comes in less than the sales price, many sellers refuse to negotiate and buyers don't want to make up the difference. So the pending sale blows up. The seller loses the buyer, and the buyer loses the home. There are other ways to deal with a low appraisal, but cancellation of the transaction is common.
- The Consumer Pays an Increased Cost for the Appraisal.
There is no free lunch. Because the appraisal management company that selects the appraisers must be paid, consumers bear the cost. Part of the appraisal fee goes to the appraisal management company, with the balance to the appraiser. Somebody has to pay the fee to the appraisal management company. Not to mention, appraisers make less money so there are fewer appraisers remaining in the business.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.