HVCC Appraisal Process

New Appraisal Guidelines Complicate Real Estate Process for Buyers

On May 1 2009, Fannie Mae and Freddie Mac adopted the Home Valuation Code of Conduct (HVCC), which they created jointly with the Federal Housing Finance Agency and the New York State Attorney General.  The HVCC was designed to insulate appraisers from lender coercion. And while the appraisers are now insulated, just about everybody is frustrated by the process –borrowers, realtors, mortgage brokers, lenders, and appraisers.

Appraisal Background

Lenders require an appraisal to determine that the house is adequate collateral to the loan. To obtain a value, we turn to professional appraisers, who input features of the home, identify similar homes (recently sold and currently listed) for comparison, and output a price on the property.

What Has Changed With The Appraisal Process

Commission-based loan officers and realtors are no longer allowed to communicate with appraisers. As a result, loan officers must request an appraisal through a third party. The “third parties” in the industry have become appraisal management companies (AMC), which are often owned by lenders to create a new profit center.

The Neighborhood Problem

Home prices fell 34 percent after the real estate bubble popped in 2008. During this time, millions of Americans have lost their home to foreclosure. The drastic changes in the market have caused home valuation to fluctuate. As distressed properties (foreclosures and short sales) crowd the market with prices below market value, other property values in the neighborhood are negatively affected. When prices drop, home valuations in the area can be dragged down.

Problems With The New Appraisal Process

With the fluctuation, real estate transactions run the risk of being burdened by a bad appraisal, and with the HVCC guidelines, this is not only much more likely to occur, but also impossible to fix without spending money for a new appraisal.

The HVCC has set up a wall between lenders and appraisers, and created a comfortable industry for the middlemen, known as appraisal management companies. These companies are responsible for much of the discontent.

1)   The price of the appraisal has gone up for the consumer/homeowner, and the compensation to the appraiser has gone down. With the extra layer of compensation added by the AMCs, consumers pay more and appraisers earn less.

2)   Appraisers make less and are often pressured into time constraints. AMCs take a cut of the fee paid to the appraiser.  More experienced appraisers leave the business due to less pay and strenuous working conditions.

3)   With no direct contact allowed, AMCs are free to hire any appraiser they choose. This can cause all kinds of problems. We have seen appraisers come from out of the area to evaluate homes in neighborhoods they are not familiar with. Why is this a problem? As we discussed earlier, the market is in disarray and foreclosures are artificially dropping prices. Now more than ever, we need experienced, local appraisers to make a fair valuation.

4)   Mortgage brokers and real estate agents cannot contact appraisers.

5)   Brokers cannot discuss value with the appraisers prior to spending your money. In borderline situations, you the broker is not able to determine if the deal is viable prior to making an investment, which puts your money at risk if the appraisal comes back worse than expected.

6)   Appraisals cannot be transported from bank to bank. Remember when we told you that lenders have added AMCs as a new profit center? As a result, banks have little incentive to let the appraisal be passed around.

7)   Brokers are unable to contest the value when the appraisal is low, inaccurate, or difficult.

Getting a Bad Appraisal

Should the appraisal come in lower than expected, borrowers attempting to refinance may find themselves underwater and unable to quality for the loan program. Luckily, there are some programs for responsible underwater homeowners (HARP), but not everybody can qualify. Purchase transactions can be derailed by appraisals that do not match the agreed upon selling price.

The Bottom Line

The appraisal industry is becoming full of less qualified appraisers who at times don’t know the market in question, thus increasing the risk of a bad appraisal. Due to the firewall between brokers and appraisers, the two parties cannot communicate to iron out the differences. If your appraisal comes in higher or lower than unexpected, the only recourse is to ask for a new appraisal and hope the problems are corrected.

Step 1. Get Pre-Approved.

How Does Pre-Approval Work?

Getting pre-approved is as easy as 1-2-3!

1. Create an Account

Creating an account is fast, easy, secure and FREE! Your account enables you to easily modify your loan application and view the status of your loan anytime day or night.

2. Submit Information

When you register for a Loan Center account, you can submit a loan application online and the sensitive information that you provide will be transmitted securely.

3. Get Pre-Approved

Kick your feet up while we crunch the numbers. Pre-approval can be done very quickly if you provide a complete and accurate loan application and supporting documentation.

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