Quality Property Appraisals at Risk Submitted by Jerry Cohen on Wed, 01/27/2010 - 11:20 In May of 2009 a new Home Valuation Code of Conduct (HVCC) was adopted. The intent of the HVCC is a noble one. It was designed to keep lenders from influencing appraisal values via coercion. Unfortunately, there are so many holes in the code that there is a great deal of doubt as to whether the HVCC will ever accomplish what it set out to do.

The Home Valuation Code of Conduct

Originally, the HVCC had a noble intent.

Coercion has long been a problem for certified appraisers. While they are trying to do their job and accurately value a property, the lender is bent on making as much profit as possible (generally at the expense of the end consumer). As such, lenders often coerce appraisers into producing numbers that fit their model rather than numbers that are accurate.

This practice was exposed when Attorney General Andrew Cuomo subpoenaed Freddie Mac and Fannie Mae, but it has been going on for some time. The HVCC was created to remove such opportunities for coercion.

In an effort to eliminate this coercion, the HVCC attempted to set up guidelines that would accomplish several things.

The drafters of the HVCC wanted to minimize multiple requests for valuations, thus negating lenders’ attempts to get appraisers to “hit the right numbers.” They also acknowledged the need for impartial oversight. This oversight could only be impartial if the lending agents had no ownership of the valuation entity.

There is little doubt that the problem of coercion needs to be addressed, and the HVCC is indeed a noble attempt, but, as the saying goes, “the road to hell is paved with good intentions.”

Impact of HVCC on the Appraisal Process

If you haven’t yet read the HVCC, you can read the code in its entirety from the Appraisal Press’ website.

In short, the HVCC is intended to address the issues of lenders coercing appraisers into giving inaccurate appraisals. That’s all well and good and it sounds like an appraiser’s dream come true. No longer will lending agents be able to twist appraiser’s arms until they hit the right number.

That would be true if there weren’t some major flaws in the code that allow lenders to circumvent the system.

According to the HVCC independent appraisers will be required to have their appraisals go through an Appraisal Management Company (AMC). In doing so, the appraiser will lose 40% of their fees to the AMC. As a result, appraisers will either lose nearly half their income, or they will be forced to raise their prices.

The latter is, of course, the more likely scenario. Appraisers will have no choice but to raise their fees to cover the extra overhead. In the end, the buyer will be left with the extra expense and it’s the buyer that the code was supposed to be protecting in the first place.

Increased appraisal fees also drastically increase volatility. As appraisers raise their fees, AMCs are forced to import appraisers. These appraisers lack intimate knowledge of the local market, a necessary factor in accurately appraising properties.

In reality though, as the code is currently worded, it won’t be AMC fees that drive certified appraisers out of business. It will be the fact that appraisers are the ones incurring regulatory risk.

The governing authorities will be watching appraisers closely. On the other hand, Automated Valuation Models (AVM) or a Broker Price Opinions (BPO) won’t be scrutinized. This can only result in lending agents using AVMs and BPOs in lieu of certified appraisers. Valuations will continue to fall under the coercion of the lender. In addition, the accuracy the HVCC was hoping for will suffer as loans will be made based on models or the opinion of uncertified individuals.

How Are Real Estate Lobby Groups Trying to Impact This Approach

While the above glaring issues could be disastrous for the real estate industry, few are proposing that the HVCC be killed. However, major renovations are needed to create a workable version of the HVCC. As it currently stands there are too many loop holes for the code to have its intended effect. While the code targets lender tactics, the many gaps in the code allow lenders to continue their corrupt actions while the buyer and the appraiser end up getting caught in the cross fire.

Lobbyists are currently petitioning Congress rethink the HVCC and reword it into the airtight type of document that frees trained professionals to give accurate assessments of properties.

If they are successful and the HVCC gets a nice makeover, it could go a long way to ensuring integrity in the real estate industry.


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