Cynthia Sulamo

Every day more teachers jobs are lost. State workers are on mandatory furloughs and our state is in a financial crisis. Creative ideas are debated on how to balance the budget. What is not typically heard is the estimated economic impact of the HVCC (Home Valuation Code of Conduct) on our state as a whole.

A recent article on the HVCC in the Appraisal Press by Dave Biggers, the founder and Chairman of a la mode (an appraisal software manufacturer and real estate services company) states "In some large states, the economic impact and the job loss figures are equivalent to losing a military base or a major manufacturing plant. (Look at California, where it's equivalent to losing over 9,800 jobs and over $700 million in economic impact.)"

"How can this be?" You ask! The income independent appraisers have lost due to the HVCC is compounded when you take into account the ripple effect it has through the rest of our economy. Out of state AMC's (appraisal management companies) take a large portion of the appraisal fee previously paid to local appraisers. These dollars are no longer available to buy goods and services here locally. We not only lose the local commerce, we lose the tax dollars on the goods no longer purchased. Ultimately the lost revenue to our state compounds to a staggering figure that makes even the $24 million dollar "missing watch dog" mandated to oversee the HVCC pale in comparison.

How many teachers could we pay with $700 million?

When looking at the overall estimated loss to California, it becomes clear this is not simply an issue for appraisers, brokers and real estate agents. It affects everyone, from our school children and teachers to state workers and the unemployed.

The real mystery appears to be why this is allowed to continue. Now that the "unintended consequences" have become quite clear, why is there not outrage?

The HVCC is set to expire in July 2010, however the changes it has created in the way appraisals are ordered has long reaching adverse effects to the consumer and our economy.

Representatives Childers (D-MS) and Miller (R-CA) introduced legislation in June requesting an 18 month moratorium on the Home Valuation Code of Conduct (HVCC). While this is applauded, in the face of the cost of the HVCC to our state which is in dire need of a balanced budget, it seems woefully inadequate.

Once again the politicians and big banks have done a great job of selling the public a story for their own benefit. The story of saving the unsuspecting public by separating the appraiser from the pressuring broker seems to have been swallowed "hook, line and sinker" as seen in comments from "Joe Public" lashing out at "dishonest appraisers, agents and brokers" over "overvalued appraisals". As with many stories there is a little truth in a lot of the statements, however often twisted and unrecognizable from the original facts.

The story being sold as reported in a press release: "Today's agreement with Fannie Mae and Freddie Mac begins to set right what had gone so horribly wrong in the mortgage industry - rampant appraisal fraud," said Cuomo. A closer look and one they hope you won't take shows that relaxed government regulations allowing "no doc" loans to be utilized in ways never intended resulted in folks "qualifying" for loans they could not pay back. Pressure from Wall Street for more mortgages that could be bundled and sold to make a higher rate of return resulted in more creative financing to allow folks to "qualify" for loans which the borrower never understood nor could repay.

It is estimated by the National Association of Mortgage Brokers that the HVCC will cost the consumer $2.8 billion dollars a year in extra costs created by long delays (extended lock-in fees) and higher appraisal fees. Many of the larger AMC's are located outside of California losing millions of dollars of revenue that would have been paid to local small business. California cannot afford to lose the tax dollars that would have been paid on this lost revenue.

Where did all this start? New York attorney general, Andrew Cuomo, a politician out to make a name for himself, saw a great opportunity in a hot topic, housing. He became aware of an alleged collusion between Washington Mutual (a big bank) and EAppraiseIT (an appraisal management company known typically as an AMC) whereby appraisers had been pressured to "meet a value" in order to make a loan, or suffer the consequences of being black listed from future appraisal assignments. Cuomo went after Fannie Mae and Freddie Mac for buying these loans. Cuomo stated that if Fannie and Freddie agreed to abide by the HVCC he would not pursue a more in depth audit of their loan portfolios and in typical political double speak in the same document stated that there would be no impact on his investigation of the loan portfolio in consideration for adopting the HVCC. As reported in the Appraisal Press "The HVCC was supposedly drafted by an as-yet-undisclosed group of industry participants, and the fingerprints seem to indicate substantial AMC and lender influence in its language".

Since Fannie and Freddie buy loans through out the United States this agreement effectively mandated nationwide rules. The HVCC does NOT mandate use of AMC's, however, many large lenders moved their appraisal ordering to AMC's as a quick way to gain compliance in keeping "appraisal ordering wholly independent of the loan production staff and process". Lenders still have the option to set up an independent appraisal ordering department or utilize a "firewall" ordering system, several which are available online for minimal cost. The confusion surrounding the document and its requirements along with a great sell job soon had many believing the HVCC mandated the use of AMC's.

The original HVCC document would not have allowed a bank or lender to own more than 20% of an AMC however effective politics resulted in an HVCC with no such restriction. Currently many large banks solely own the AMC that is ordering their appraisals. Appraisers no longer able to work directly with their broker clients which gave them multiple independent income streams now work for a few large AMC's for smaller fees making the appraiser more dependent on their "good will". Unintended consequences many say, but it makes one wonder.

Who is overseeing the HVCC? The HVCC called for a government run Independent Valuation Protection Institute, funded with $24 million dollars from Fannie Mae and Freddie Mac, which to this day has not been implemented and remains a one page website that states in part "A hotline number and email address is to be established and provided for consumers to contact if they believe the appraisal process has been tainted or if they have been affected by appraisal fraud." The website has no contact information and is a dead end. Individual state licensing boards have set up hotlines to deal with illegal pressure against appraisers however this is not mandated by the HVCC.

Appraisers doing work for AMC's must sign documents stating they will not disclose what they are getting paid to do an appraisal. AMC's have no licensing requirements and are not overseen by any government body. AMC's can be solely owned by the bank or lender. The public is unaware that often 40 - 60% of the appraisal fee is kept by the AMC resulting in a new profit center for the lender or bank. Legislation to mandate disclosure of appraisal fees paid to the appraiser has been successfully blocked by the large banks.

Appraisers have been state licensed since 1992 requiring mandated education, a state test and continuing education. Appraisers are typically small independent business owners and as such have never had a strong voice in government, making themselves easy targets to point blame at when anything goes wrong in the lending community. As small business owners it was typical for appraisers doing lending work to market themselves to lenders, brokers and agents. As a Folsom appraiser with over 18 years of experience, I have been fortunate to work with honest ethical loan agents that worked hard to protect their clients' interests. Did I ever encounter pressure? Yes, but as a licensed professional I walked away from such situations. Due to the HVCC, I can no longer have direct contact with the loan agent so the information you provide does not get to me. It takes longer to get the information I need to do my job. As a licensed professional I should be able to get all the information available including your opinions of value, sift through it all and still come up with an estimate of market value, well documented and supported by local market data.

Most seasoned appraisers have seen a large decline in their business since the implementation of the HVCC as the AMC's are ordering from the lowest bidder which is typically the newest, least experienced appraisers and often from out of town with no local knowledge of the intricacies of our market. Many appraisers with 20+ years in the business have seen more than a 75% decline in their businesses which they directly correlate to the HVCC.

So who has benefited from the HVCC? Certainly not the public and not the appraisers. Banks, however, now have a new source of revenue and no watchdog. The HVCC has not solved the issues it was purported to set out to correct and is set to expire after 18 months (in 2010). This comment from a legal blog, RESPA, is interesting indeed, "the timing of Cuomo's departure and the expiration of the HVCC rules is very interesting. 2010 the HVCC rules expire and guess who is out of office. ?" The HVCC will leave in its wake the destruction of many small honest business folks, the large banks richer, and the general public still not knowing "The Rest of the Story"!

The FHA roster of approved appraisers is set to "purge" appraisers that have not meet the Certified Residential or Certified General requirements of licensing by their state on Oct, 1, 2009. This has been a long time coming and well publicized over the past year. The effective date was moved from Jan, 1, 2009 to Oct 1, 2009 to give appraisers more time to upgrade their license.

The FHA appraiser roster as of Aug. 26, 2009 shows 8096 approved appraisers in California with 2356 of them at the licensed level or 30% which have not meet the upgrade requirements and are due to be removed from the list if the requirements have not been met but the Oct 1st deadline.

FHA has chosen to set their requirements higher than other lending requirements. FHA also has harsher penalties for those not meeting their appraisal reporting requirements. This is good for all of the lending community since if we do not set high standards we leave ourselves open to more government intervention on our behalf to correct issues.

If you want more information on appraisal requirements for FHA which are often misunderstood there is a great article written you can get by Goggling "New FHA appraisal requirements" it is a great "cheat sheet" of some of the issues that are often found.

Keep Informed! Keep Positive!

So often we read about the HVCC and unfortunately much of it is misinformation. Just this morning our local Folsom Telegraph had a letter written by a "Folsom Mortgage Broker" that in part stated that due the the HVCC all appraisals must be ordered by an AMC. Sadly this myth is widely circulated and the facts are not checked.

Here is part of the Rest of the Story:

I read the article on home appraisals in this mornings addition and was dismayed to see that the facts were not checked by the "Folsom Real Estate Broker" that wrote the letter. The letter to Miki states that the HVCC "now require all appraisals for conventional loans to be ordered through Appraisal Management Companies, or AMC's" this is not accurate. The HVCC applies only to loans that are sold to Fannie Mae or Freddie Mac and AMC's while they have gained a large market share since the HVCC came into effect on May 1st 2009 they are not mandated.

Here is a portion of the "frequently asked questions" from Fannie Mae's site regarding the HVCC:

Appraisal Management Companies (AMCs)
Q42. Is a lender required to use an AMC for ordering appraisals?
No. A lender may order appraisals directly from an individual appraiser.

Q43. May an AMC affiliated with, or that owns or is owned in whole or in part by the lender or a lender-affiliate, order appraisals?
Yes, an AMC affiliated with, or that owns or is owned in whole or in part by the lender or a lender-affiliate, may order appraisals if the AMC meets the criteria of Section IV.B. of the Code.
Q44. May a lender direct a mortgage broker to a specifically authorized AMC that will receive information from the broker about the loan application and begin the appraisal process?
Yes, as long as the lender has previously arranged for its appraisal process to be managed by the specifically authorized AMC. This process is compliant with the Code because the broker is not responsible for selecting, retaining, or providing for payment of compensation to the appraiser.

The confusion seems to come from the fact that mortgage brokers can not order directly from an appraiser under the HVCC code however lenders and banks can. Some "mortgage brokers" are "direct lenders" or "correspondent lenders" which can all order from an appraiser directly as long as they set up an ordering system that separates the ordering of the appraisal for Fannie Mae or Freddie Mac loans from directly benefiting from the results of the appraisal. Portfolio Lenders are not included in the HVCC as they are not selling to Fannie Mae or Freddie Mac.

Some of the local lenders have set up "round tables" of local appraisers to order their appraisals from which is allowed under the HVCC and while some call them an AMC others do not. This allows local appraisers that have been vetted by the lender and is knowledgeable in the local market to continue doing their work.

The HVCC also has a "shelf life" as currently written. This is an excerpt from the Appraisal Scoop another great resource to the facts of the HVCC:

Repeal of the HVCC: The HVCC is due to expire in 2010 (18 month life). By the time all the efforts to block the HVCC can be enacted . . . it could die all on its own. The problem? The impact of the HVCC has ALREADY become part of Fannie Mae's and Freddie Mac's Selling Guide and lenders and brokers have already changed their business models. The appraisal profession has been adversely impacted for years to come.

Miki, you are widely read in the community and can provide a great resource to dispel the misinformation regarding the HVCC which can greatly help consumers and the lending community.

If you want the whole story great sources of information include the Appraisal Scoop and Fannie Mae's web site which includes the HVCC as written and the FQA (frequently asked questions) which are updated from time to time.

Get the Whole Story! stay informed and make informed choices.

I received an interesting call today from a broker that was trying to understand an appraisal and why the value was not at the "high end of adjusted comps". It got me to thinking of how much our world has changed and with the separation of appraiser's from the rest of the industry "for our own good" how can our industry partners understand why we do what we do?????

In the past, often reading an appraisal seemed pretty straight forward. Look at the comps and the value - 3 comps closed in the past 12 months - stable or increasing values - yep looks good.

Then came the new reality with declining values, AVM's, new underwriting rules and new rules and forms for appraisers.

Appraisers were always to analyze the market and explain if it was seeing an oversuppy, in balance or undersupply - were values going up, down or stable - how long was it taking to sell homes HOWEVER now this data has to be in the reports with more detail and statistics than ever before and the underwriters have new tools that give them number of their own but without the detail and neighborhood specific knowledge of an appraiser that knows the area.

Reading a report is more complex, just as writing one is.

-Say we have a home that sold 8 months ago for $510k, was on the market for the same amount of time or a bit longer than is typical in the area.

-The new owners have done a few minor things, replaced missing lighting, some paint however it was due to preference not the condition of the home when it sold as it was in good condition.

-Now they want to refi. Sales in the area are all over the board, ranging from the high $300's to $600k with a large range of quality, views and site sizes in an area of custom and semi-custom homes.

-For homes in the size range of the subject ( no more than 20% variance) and age in the subject's neighborhood there are 23 homes on the market and there were 17 sales in the past 6 months, giving us an inventory of 8.1 month supply.

-MLS statistics show the market has been declining 1/2% to 3/4% per month in the past 6 months.

Given all these factors is it logical the owners would expect the value to have increased on their home? For the lender to expect the value to have increased? Do we only look at the "recent" sales which are all over the board and new underwriting guidelines which tie the appraisers hands to use 2 that are no more than 90 days old and one that is no more than 6 months along with 2 pending or listings which are adjusted for the typical ratios of SP % LP.

Not only does the appraiser analyze the market data for closed sales but also what did the home sale for? With no significant changes to the home and it had been on the market a bit longer than typical which would say they did not "get it below market" when they purchased it, it would follow that taking the typical declining % found in the market to the sales price should give an indication of value now. Some work was done on the home and lawn added to the back yard but no other landscaping. This would logically say the home may not have declined the full amount the typical market is seeing but would you expect to see it increase?

Sometimes it's hard to step back and see what's there and not just what we would like to see.

No longer can you take an appraisal and look at the comps and value and come to an "easy conclusion". Appraiser's cant - Underwriters dont -- helping the rest of our industry partners understand the new reality when we are "not suppose to talk to them" is a real challenge.

Underwriters often call the appraiser and ask "why didnt you use this comp? it's more recent and it's close to the subject" even when the report is well supported and all the "fact" support one another. I'v had this call only to find out the "comp" the underwriter is asking about was not a sell at all, but a foreclosure that showed up in their data as a sale in error, sometimes the "sale" has other factors uncovered in the appraisal process that made it unsuitable, but still the questions are asked and must be researched and answered.

Oh, What a complex world we are in. This too will change - change is the one sure thing.

In the meantime, ask with an open mind when you have questions on the report you just received. Look at the property from an underwriters perspective or like it is your own money your lending. Is this what truely makes sense and is supported? or am I just hoping the few high sales in the area are "the best comps" even when they are not the most recent and most similar to the subject?

We are all looking forward to this market showing stronger signs of turning back around. Many of our areas show signs of stabilizing. Area's that had seen 18 - 24 month supply of homes on the market often now have less than 6 months supply of available listings. Marketing times have declined in many areas and homes are seeing multiple offers. Wouldn't it be great to see this in the news? Consumers have been getting a constant diet of negative - over hyped and inaccurate statistics and still we are seeing some positive things in the markets. This is America - the land of hope.

Here's to you and a better understanding of our real estate partners.