What America Needs to Know About HVCC and Financial Reform

This site is all about the real estate appraisal industry and in particular the complete destruction of thousands of small businesses across the country as a direct result of the Home Valuation Code of Conduct (HVCC) and its follow-up regulations that are contained in the recently passed Dodd-Frank financial reform bill.

Perhaps it will just be cathartic for me, but hopefully it will be productive.  Regardless it has got to be better then yelling at the walls and angrily attempting to explain what has happened to my business to family and friends.   If you are in the business you know the issues, if you are not you might not be familiar with the outright theft and monopolization of the residential real estate appraisal industry at the hands of massive companies who were aided and abetted by first the former Attorney General of New York and now Governor Andrew Cuomo and later by the U.S. Congress through the adoption of the Dodd-Frank bill which codified this theft.

This is the story that to my knowledge has never been properly aired by any news organization.  If people have any knowledge of HVCC it is the spin that Fannie, Freddie, politicians, national banks and title companies along with but to a lesser degree the National Association of Realtors and the Appraisal Institute have spun.  Basically it is this, the housing market collapsed in large part because residential real estate appraisers either colluded with or were inappropriately influenced by loan officers.

Beyond the absurdity of very small business people (most of whom work out of their home) collapsing the housing industry, it is true that a small percentage were inappropriately influenced and an infinitesimal amount were involved in colluding.    Fortunately there are laws and regulations that account for these deviants.

FIRREA, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 was our governments response to the S & L Crisis of the late 80′s.  Similar to HVCC, FIRREA in large part blamed the residential appraiser for that collapse and introduced appraiser licensing and USPAP (Uniform Standards of Professional Appraisal Practice).  The effects of this legislation is the subject of another discussion at another time, however since the residential real estate appraisal industry is now subject to another completely new set of regulations and has been blamed for the collapse of the housing industry, in the minds of the politicians it must have failed.

It is very ironic that after the collapse of the two housing bubbles that real estate appraisers faced the brunt of the accusations.  It is very odd that a group of people who make the least amount on any real estate transaction, far less than the Realtors, loan officers, banks, and title companies, are blamed for the troubles in the industry.

The truth is the appraiser is an easy mark.  We work largely alone and behind the scenes.  We are not wealthy and we do not have much interaction with other appraisers.  We are not organized and we do not have any political clout.  We are the perfect scapegoat, again.

This is a story of what happens when the socialized secondary mortgage market, meets corrupt, arrogant and or ignorant politicians and how the Crony Capitalist mega corporations profit while destroying the life’s work of thousand of honest, hard working Americans.

One thought on “What America Needs to Know About HVCC and Financial Reform

  1. Instead of ruining the life long work of countless, honest, small business owners,
    it would be nice if someone might actually attempt to get to the bottom of the real estate valuation problem.

    Fact: There are corrupt appraisers and loan officers who have colluded for money.
    Fact: This is an extremely small percentage of appraisers and loan officers.
    Fact: Every profession has crooks.
    Fact: By definition, it is impossible to regulate criminals.
    Fact: The licensing laws (FIRREA) of the late 80′s reduced the barrier of entry into the appraising profession resulting in many more less educated and experienced appraisers.
    Fact: The licensing led to a reduction in the quality of appraisals and a reduction (adjusted for inflation) in the fee for an appraisal.
    Fact: Appraisers do face pressure from lenders.
    Fact: There is different pressure for refinances and purchases.
    Fact: Cuomo’s solution was nonsense and will only make matters worse.

    With these facts in mind we can discuss the issue in more detail. Ignoring the crooks, which give every industry a bad name, and are way to small of a segment to have any affect on the housing bubble, most lenders are trying their best to provide a service (lend money) to a consumer who wants that service. Way down the list of things loan officers are concerned about is convincing the homeowner to borrow more than they are originally hoping for. Most of the time the loan officer must work extremely hard just to get the minimum amount the borrower seeks, approved. Many times the homeowner is desperate for the loan because it will be used to help pay off consumer loans that are at a much higher interest rate. (Hardly taking advantage of the homeowner). The pressure on the appraiser is a result of the loan officer trying to service his clients the best. Since the loan will be based on the value of the home the lender and homeowner need the highest value possible. Since an appraisal is an educated estimate, there can be a difference of opinion. Most homeowners already have an inflated opinion of the value of their home so it is ironic that they are complaining that their home was appraised to high. I don’t think any homeowner would wish that the appraiser was overly conservative thereby not being able to obtain a loan. The appraiser is not getting rich by appraising the home a few percentage points higher than it may be worth so the homeowner can get the loan they wish. They don’t get kickbacks the fee is still typically around $350. There are some solutions but this is a minor problem in the big scheme of things.

    The bigger issue (and where the real story is) is the pressure appraisers face when appraising a home that is under contract. It is an extremely rare case that a potential buyer acting in their own best interest does such a poor job searching for a new home that they are duped into paying significantly more than a home is worth. The market is not perfect, variances do exist. I don’t think anyone, the buyer, seller, Realtor, lender wants to cede all of the power to an appraiser. Do you really want an appraiser to be so conservative with value that contracts are constantly being broken by appraisers who feel that their opinion is far superior to the buyer and seller who are both acting in their own interest? I think everyone would agree that the appraiser should ensure that the contract price is reasonable but not be overly influenced by personal taste or minor variations in the market.

    The pressure comes in the form of additional concessions that are added to the contract price to facilitate the deal. In particular I am referring to seller paid closing cost and down payment assistance. Many times a potential buyer can afford the payment on a mortgage but don’t have the cash necessary to pay their own closing cost or the down payment. To facilitate the purchase sellers will agree to pay the buyer’s closing cost and sometimes through and intermediary (Nehemiah, Ameridream etc) the buyer’s down payment. Of course the homeowner is not doing this for charity (they still expect to net the market value of their home) so his only recourse is to boost the sale price. It then falls upon the appraiser to appraise the home at the new raised contract price. Yes, it would be great if the appraiser could always resist the pressure but there is a considerable amount. Buyers, sellers, Realtors, lenders all want the home to close and the appraiser is the only clog. The appraiser gets nothing more than the typical $350 fee so his only motivation is to continue getting assignments. As noted above the licensing requirements of the late 80′s resulted in so many new appraisers that the fees and competition is tremendous and appraisers are often desperate for any assignments.

    Instead of attempting to add more regulations to the appraisal process (all have failed miserably and the unintended consequences have made things worse) they should eliminate the source of the pressure, seller concessions. The amazingly simple solution is for Freddie and Fannie to not buy any loans that have any seller paid closing cost or down payment assistance (the new bill recently passed attempts to do away with the down payment assistance). The story is that although everyone want to complain nobody actually wants to solve the problem because it would significantly reduce the number of transactions. Everyone from Fannie and Freddie, banks, Realtors, builders, buyers, sellers, and government all benefit from more homeowners.

    If government (OFHEO, Fannie, Freddie, etc) wants to continue to allow seller concessions and subsidize homeownership than at least be honest about it and take the pressure off of appraisers who are barely surviving. Why does all of the pressure fall on the appraiser? Why can’t an appraiser simply be honest and tell the lender that the home is worth a few thousand less than the contract price and the loan would still be approved? The root lies in the Community Reinvestment Act. In an attempt to eliminate so called “red lining” Congress overly regulated the lending process to take out any judgement of the loan officer. The result is the only person that can input his “opinion” is the appraiser which is why there is so much effort to attempt to influence this opinion. Do away with the Community Reinvestment Act and put the pressure of the loan performance where it belongs, on the lender. We have come a long way since the Community Reinvestment Act, no “greedy” loan officer is not going to do a loan simply because of the color of ones skin.

    Of course government can never admit their errors that have caused this problem, FIRREA (licensing law) and the Community Reinvestment Act so instead they are adding even more regulations that are so foolish that they have destroyed an entire industry.

    Andrew Cuomo’s solution, the Home Valuation Code of Conduct, has the effect of mandating that each bank or mortgage company use only one appraisal company. Apparently he believes that if he can create a few appraisal companies that have a monopoly on all of the appraisal business (these monopolies are often times called appraisal management companies) that this will somehow result in better appraisals (I wonder if there was any lobbying involved). His thinking is that if a bank uses one company that is so large and burdensome that there will be little chance that their employee, the appraiser, could ever provide service to their client, the lender, which may require some communication between the two. Of course this is not how he would characterize it but it is the affect. The so called Appraisal Management Companies, have convinced him that they are the solution. The truth is that all they do (the may attempt to differentiate themselves) is maintain a list of thousands of appraisers (who they have never met or work they have never viewed) who are willing to work for half of the price of the market based fee of approximately $350 (because these companies have a monopoly). Of course the consumer will still pay the same if not more.

    The Home Valuation Code of Conduct has put thousands of small appraisal companies out of business. These are the often the most established and professional firms around. The companies that are not easily influenced and that take pride in passing on their knowledge to new appraisers. There is no other industry ever where it has been forbidden for a client to speak to a service provider. This only the beginning of the problem. If you think the lending process is messed up, just wait?

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