The HVCC Explained
The Federal Housing Finance Agency announced the HVCC in December of 2008 in a brief news release: FHFA Announces Home Valuation Code of Conduct.
Where did the HVCC Come From?
The HVCC is intended to protect appraiser independence by enacting a figurative “firewall” between appraisers and lenders to prevent lenders from pressuring appraisers into arriving at pre-determined (usually higher) property values.
It is the result of an agreement between the New York State Attorney General, Andrew Cuomo, Fannie Mae, Freddie Mac and the Office of Federal Housing Enterprise Oversight (OFHEO). In November of 2007, the New York Attorney General filed a class action lawsuit against First American Corporation and its appraisal management subsidiary, eAppraiseIT. An brief overview of this lawsuit can be found in this article called Washington Mutual Faces Class Action Lawsuit. In a nutshell, the lawsuit accused them of allowing Washington Mutual to pressure appraisers to change appraisal values (usually to a higher value, to support more lucrative loans), as well as to select which appraisers would be used for Washington Mutual’s appraisal reports.
The original lawsuit is still playing out in the New York courts. An update can be found in the June 8th, 2010, Reuters article entitled, NY court allows Cuomo suit over bogus home appraisals.
Ultimately, regulators seized Washington Mutual in September 2008 after it had amassed about $176 billion of home equity, adjustable-rate and subprime home loans on its books. As reported in the NY Times, the seizure of WaMu represents the largest bank failure in American history.
Effective Date of the HVCC
The HVCC became effective on May 1st, 2009 and dramatically changed the face of the appraisal industry in the United States.
We are now 14+ months into appraising under the HVCC. Although the intentions of the HVCC were noble, the impact to the real estate industry has been staggering.
The Unintended Consequences of the HVCC
Many, of not most, lenders that are in compliance with the HVCC have maintained compliance by routing their appraisals through Appraisal Management Companies (AMCs).
AMCs receive appraisal orders from lenders (including mortgage brokers), and send them out to appraisers that are on their approved appraiser roster. Because AMCs take a haircut of the fee charged to the consumer, an amount that can be as high as 50%, the appraiser that performs the appraisal receives a lower fee than he or she would have before the HVCC.
Many experienced appraisers have found that they cannot cover their business expenses on 50% of the fees that they used to receive for the same work. Many experienced appraisers have shuttered their businesses as a result.
Many of the appraisers on the AMC rosters are newer, and/or they are willing to drive longer distances to perform an appraisal. This means that many appraisals are being done by appraisers that may not be familiar enough with a local market area to truly understand the subtle differences in the market values in a neighborhood.
“Subtle differences” in value can make or break a home purchase, or a refinance. Values that come in artificially high may induce a homeowner to take on more debt than the true value of the property can support. Values that come in artificially low can break a purchase deal, or force a buyer or seller to bring more money to the table to keep the deal together.
For the real estate market to work, it depends on market values that are indeed set by the actual market values of the properties that are selling. The best appraisers to determine the market value of a property are the ones who are intimately familiar with a neighborhood or a market area.
Unpredictable Order Volumes
Another unintended consequence is that appraisers now have no way to gauge the volume of business they may do in a month. An AMC that sent them 20 appraisal orders last month may send 2 this month. Pre-HVCC, the appraiser would have had a working professional relationship with the lenders that send him or her business and would have a better idea of the likely monthly volume, with seasonal fluctuations. This makes it difficult for licensed appraisers to take on appraiser trainees, and since trainees are the appraisers of tomorrow, this may lead to a shortage of qualified appraisers a few years from now.
Alternative to Appraisal Ordering Through AMCs
Although we’re on the approved roster for dozens of AMCs, we expect more of our business going forward to instead come to us via a la mode‘s Mercury Network. The Mercury Network provides HVCC appraisal ordering through an easy-to-use interface that provides the necessary communications firewall for appraiser independence.