The Home Valuation Code of Conduct (HVCC) went into effect May 1. This settlement agreement between New York Attorney General Andrew Cuomo, Fannie Mae and Freddie Mac, and the Federal Housing Finance Agency, is designed to enhance the independence and accuracy of the appraisal process, and provide additional protection for homebuyers and mortgage loan investors.
The purpose of the agreement was to relieve the undue pressure on appraisers to appraise a property at a value that would ultimately facilitate the loan. The elimination of this pressure would result in more accurate appraisals…at least that was the rationale behind the legislation.
Appraisal fees are not based on loan amounts, nor are they contingent upon whether loans go through. The purpose of an appraisal is to mitigate some of the risk that a lender is undertaking by having an independent party verify the market value of the home. Taking out the parties that have a vested interest in seeing the mortgage transaction close, i.e. real estate agents and mortgage brokers, should let the unbiased, independent appraiser produce an unbiased and independent value based on nothing more than market data.
Sounds great, right? Well, it has been over a month now so let’s see how it is working out.
As of May 1st all appraisals must be ordered by a third party or using a process independent from loan production. The HVCC bars appraisers from interacting at all with agents, mortgage brokers, loan officers, and others involved in loan production. A department created within a lending institution or mortgage company that is completely separate from its loan production department, or a lender-approved appraisal management company, does all the ordering of appraisals and facilitates the delivery of the report. Appraisal management companies (AMCs) have become the third party “agents” of appraisal services. They create the barrier between banks and mortgage loan originators, and the appraisers who perform the real estate appraisals.
No Oversight
As it stands now, appraisal management companies have virtually no state or federal regulatory oversight. Although frequently negotiated in their contract with lender clients, they can charge the borrower whatever they deem appropriate for the services they provide. They are not required to give the borrower an accounting of exactly where or to whom the fee is going. The Federal “Truth in Lending Act” of 1968 requires clear disclosure of key terms of the lending arrangement and all related costs; however, disclosure of the allocation of fees paid to AMCs is not required. Yet AMCs typically retain as a management fee a large percentage of what the borrower pays. The borrower believes that they are paying for a full appraisal based on that fee. They should expect to have a competent and qualified appraiser performing the valuation analysis. However, in most cases, the competent and very qualified appraisers will not work for the significantly lower than average fee that the typical AMCs offer. The quality of the appraisal suffers as the inexperienced and less competent appraisers are the only ones who will work for these low fees.
Let me share with you how low these fees can get. As an aside, it is interesting to note that appraisal fees have been virtually the same for the past 10 years. Most appraisers typically charge anywhere from $250 to $350 for a FNMA form report. AMCs solicit appraisers to perform the very same appraisal for fees as low as $100 and typically no higher than $225. Meanwhile, they customarily charge the borrower the “going rate” for the appraisal. In addition to the low fees, AMCs routinely require that appraisal reports be completed within 48 to 72 hours from the moment that they are accepted. That hardly allows for enough time to schedule the appointment, inspect the dwelling, research the market and ultimately develop a credible appraisal.
AMCs should be required to disclose the fee paid to the appraiser who completed the appraisal and the fee allocated to the AMC for the services they provided in ordering and delivering the report.
The goal of the HVCC was to ensure the best possible appraisal done by the most competent appraiser. In practice the HVCC falls short of the goal.
