Pending federal legislation could end the Home Valuation Code of Conduct, instituted less than one year ago to protect consumers against inflated home appraisals.
The code aims to prevent falsely inflated appraisals by increasing appraisers’ independence, eliminating the relationships between mortgage brokers or real estate agents and appraisers.
But HVCC has caused a maelstrom in the real estate appraisal industry, where critics – even those who support the code’s overall goal of preventing fraudulently inflated appraisals — claim the code is harming the appraisal industry as a whole.
Under HVCC, mortgage lenders—not mortgage brokers or real estate agents—must select and hire appraisers for home loans that will go to Fannie Mae or Freddie Mac, the government-sponsored entities that have become the nation’s largest mortgage finance companies. As of May 1, 2009, Fannie and Freddie no longer purchase loans that do not comply with HVCC.
Lawsuit Brings New Code
The code was negotiated as an agreement among New York Attorney General Andrew Cuomo (D), Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency, which regulates Fannie and Freddie. The agreement came in response to a lawsuit Cuomo filed against the appraisal management company eAppraiseIT. The suit charged eAppraiseIT had succumbed to pressure from one of their clients to inflate appraisals—a not-uncommon practice that helped contribute to the housing bubble and, later, the housing collapse, says T. J. McCarthy, a Chicago-area appraiser and member and former chairman of the Illinois Real Estate Appraisal Licensing Board..
“Anyone in a position to benefit financially from the outcome of an appraisal should not be involved in selecting the appraiser or having direct communication with the appraiser,” said McCarthy. “Keeping commissioned loan originators from ordering and controlling the appraisal process is a step in the right direction.”
But while this separation may be a step in the right direction, critics – including McCarthy — say the rest of HVCC is many steps in the wrong direction. Criticism of the code has been rampant. Among other things, critics argue HVCC has led to lower house prices, that it is not being enforced, and that the code is harming the appraisal industry.
“Eighteen months ago 60 percent of appraisals came from brokers,” said Bill Garber, director of government and external relations for the Appraisal Institute, a Chicago-based association for professional real estate appraiser. “Appraisers are frustrated.”
Exemplifying appraiser anger with the new rule, the industry newsletter AppraisalPress titled an article “HVCC: The Cure Is Worse Than The Disease.” At the end of December, one New York appraiser was arrested for threatening to kill Attorney General Cuomo, so strong were his objections to the code.
In July 2009, the Federal Housing Finance Agency issued a report on HVCC in which many of the appraisers’ complaints were addressed. The report stated HVCC is “serving the intended purpose” and is not—contrary to reported “misinformation,” as the agency report called it—resulting in low appraisals, appraisals being performed by unqualified appraisers, and increased closing costs.
“The poor practices of the past are being corrected and lessons learned are being addressed,” the FHFA report stated.
Bill Imposes Regulations
These lessons may be addressed on a national scale. The Wall Street Reform and Consumer Protection Act of 2009, which passed the House in December 2009 and awaits introduction in the Senate, would end HVCC and call for national regulations ensuring appraisers’ independence.
McCarthy says serious damage will already have been caused to the appraisal industry by the time any such bill goes into effect. He says appraisers are already among the most regulated licensed professionals, and bad appraisers will still thumb their noses at regulators.
Even so, McCarthy says he would support the bill and believes other appraisers would, too.
“Would the House bill be a step in the right direction? I absolutely think it would be. Still, enforcement is the key,” says McCarthy.
Arin Greenwood ([email protected]) is a writer and lawyer in Alexandria, Virginia.
“Strengthening Appraiser Independence and Improving the Valuation Process,” Federal Housing Finance Agency: http://www.heartland.org/budgetandtax-news.org/article/26749