Davids’ Big Island Mauna Lani Real Estate

January 24, 2009

Home Valuation Code of Conduct: Buyers Take Notice

Filed under: General,Real Estate Information — David C. Swanson @ 7:02 pm

The Federal Government is attempting to regulate appraisers and mortgage lenders in 2009. How will new regulations affect Big Island buyers? Clearly, there are big changes ahead for the appraisal and mortgage industries. Federal Housing Finance Agency (FHFA) Director James B. Lockhart has recently announced that Fannie Mae and Freddie Mac will implement a revised Home Valuation Code of Conduct (HVCC) effective May 1, 2009.

The code is primarily directed at regulating banks and other mortgage lenders and promoting appraisal independence. Mortgage brokers and realtors will no longer be allowed to choose appraisers. Instead, the appraisers will be chosen by the lenders. In the case of lenders’ in-house appraisals, the loan-origination departments will not be allowed to influence the valuation process in any way.

According to Christopher Palmeri of Business Week, “The appraisal industry has justifiably come under fire for its role in the great housing bust. Property appraisals, required by lenders before a loan is made, are supposed to provide an independent assessment of the home’s value. But during the boom, appraisers routinely signed off on a doubling or tripling of home values, sometimes racked up in just a matter of months. Investment properties were appraised at prices that made no investment sense.”http://www.businessweek.com/bwdaily/dnflash/content/jan2009/db20090118_003174.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis

Palmeri continues, “The new rules only apply to loans bought by or guaranteed by Fannie and Freddie. Lenders who operate independently of those channels do not have to follow them. But since Fannie and Freddie buy or guarantee a huge share of all U.S. mortgages, the changes should have wide application.”

Most professional appraisers strongly disapprove of the HVCC. They fear that the independent appraisers who have always depended on referrals from mortgage brokers will be forced out of business. They believe the HVCC will compel mortgage brokers and banks to hire a new appraisal workforce for independent appraisals, or to use the services of large appraisal management companies (AMCs).

AMCs are a dirty word in today’s appraisal industry. George Dodd, an appraiser based in Virginia, says “the most experienced appraisers (will be) the hardest hit” by the new code “because of our unwillingness to sacrifice integrity and quality by doing business” with management firms [AMCs]. Rather than work for peanuts, Dodd said, “I can flip burgers at McDs for more.” http://www.washingtonpost.com/wp-dyn/content/article/2009/01/09/AR2009010901920.html

AMCs are notorious for demanding that appraisers perform their work for half the usual fee, while at the same time charging lenders and borrowers more for the appraisal. This has a negative impact on the quality of the appraisal as individual appraisers might try to compensate for their lost income by performing a higher volume of appraisals.

Proponents of the HVCC believe that it will hold the appraisal industry to a higher standard and protect the appraisal process against inappropriate influence and coercion. They argue that the impact on appraisers will be minimal and positive. AMCs are mentioned several times throughout the HVCC, in that AMCs are prohibited from pressuring appraisers to reach pre-determined values.

The National Association of Mortgage Brokers and appraisers’ trade organizations have plans to appeal to Congress and Fannie and Freddie regulators to reverse certain aspects of the code, for instance, the code’s ban on broker selection of appraisers. Four of the five federal bank regulators have called for the withdrawal of the HVCC, stating that it could contribute to a greater incidence of inaccurate real estate appraisals and consumer credit problems.

How does all this affect mortgage borrowers? One commonly voiced concern against the HVCC is that the use of less experienced or non-local appraisers could arbitrarily deflate property values further, forcing buyers to come up with larger down payments, creating difficulties with refinancing, and ultimately leading to a higher risk for foreclosures or short-sale contracts. An overvalued appraisal can have severe consequences for a homeowner later on if they have to sell or decide to refinance, and then learn that they owe more for their property than it’s worth.

With the upcoming May legislation and regulations, what is the future? The US government will hold lenders, banks and appraisers in a tighter grip. Will the real estate buyer be more protected or less so? It will be interesting to see how this all unfolds. How do you see it?

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