Random thoughts on art, technology, stuff, and occasionally Real Estate: May 2009

As of Friday, May 1, 2009 - there is a new rule that will directly affect most everyone trying to purchase or refinance a home. 

The Question:  Will this new rule help or hurt homeowners, or do we know yet?

The Details
The rule is called the "Home Valuation Code of Conduct" but is referred to in the industry by it's initials H.V.C.C.  The HVCC is the outgrowth of a lawsuit filed by New York Sate Attorney General Andrew Cuomo designed to "improve the reliability of home appraisals," according to FHFA, Fannie and Freddie's regulator.  Fannie Mae and Freddie Mac have agreed to adopt the policy and only buy loans that were appraised under the Home Valuation Code of Conduct.

How Will This Rule Theoretically Help Improve The Reliability Of Appraisal Values?  

1. The loan officer can no longer communicate directly to the appraiser - not tell them about new sales or larger square footage, not even to order the appraisal.  This has to be handled by a person that does not benefit from the closing of a loan.  The intent is to keep crooked loan officers from working with crooked appraisers to artificially inflate the value of an appraisal to close a loan.  This hurts the lender when there is a default. 
2. A hotline also has to be set up for appraisers and borrowers so they can report any potential abuse or violations of the code. 

Who Could Be Harmed By This Rule? 

1. Borrowers: Because the code makes the transfer of an appraisal from one lender to another almost impossible due to the requirement that the lender that delivers the loan must represent and warrant that the HVCC has been followed in the ordering process.  That is impossible to know when you did not order the appraisal but another lender did.  This will force the new lender to require the customer to pay for another appraisal. 
2. Borrowers: The HVCC makes the ordering of appraisals basically illegal for mortgage brokers.  If your preferred loan officer is a broker, they will have to collect your money, and then ask the end lender to order your appraisal.  This will add time to the process and leave the ordering strictly up to the lender the broker is using.  Worse yet, if the lender the broker wishes to use turns down the file but they think another lender will approve it, it will cost the borrower another appraisal. 
3. Borrowers: Lenders that deal with mortgage brokers will have to set up a huge network of various appraises all over the U.S.  Or, they could use an Appraisal Management Company.  Because the lender will not have to pay the Appraisal Management Company until they have collected that money from the borrower, the lender will have no real reason to try to keep appraisal costs low for borrowers.  And the mortgage broker has no choice, other than using another lender.  This is a recipe for out of control appraisal costs. 
4. Borrowers: Appraisal Management Companies have a bad reputation in the industry of using mediocre to inadequate appraisers.  Otherwise, why would these appraisers take 60% of their normal fee for an appraisal?  If this remains to be the case, borrowers will pay full price to receive  an inadequate appraisal and there will be little to nothing they will be able to do about it. 
5. Mortgage Brokers: Because they will be forced to rely on the end lender's opportunity or desire to  order the appraisal quickly, the loan process with a broker will most likely take longer than using a direct lender.  The broker and their company also lose all direct contact with the appraiser, which means any challenges to a low appraisal will be made at the discretion of the lender. 
6. Appraisers:  The majority of appraisers in the U.S. do a great job and deliver fair market appraisals.  Because the HVCC eliminates the ability for the loan officer to use an appraiser they know is capable and rely on, the best appraisers will be forced to become part of the network of one or more of the Appraisal Management Companies and accept about a 40% loss per appraisal vs. what they receive now.  Many very good appraisers will probably leave the business or go out of business. 

A press release from Attorney General Cuomo's office, from March of 2008, states: Lenders will be prohibited from using "in-house" staff appraisers to conduct initial appraisals and Lenders will be prohibited from using appraisal management companies that they own or control.

However, several banks own appraisal management companies and have now been allowed to continue that ownership.  Is it just me or does something really sound fishy here?  I certainly hope this works out better than what I suspect.  But right now, our company and others like us seem to have an advantage because as lenders.  I am concerned for many of my friends that are in traditional mortgage broker shops, because they are going to be at a big disadvantage with this rule.  If things don't change, I fear many of them will be forced to shut down.