How Will Financial Reform Affect the Future of HVCC? Part II

When I wrote Part I of this article, I had hopes that the financial reform bill would sunset HVCC--the Home Valuation Code of Conduct--which was the agreement made between Andrew Cuomo and Fannie Mae and Freddie Mac in order to get Cuomo to drop a criminal investigation against both entities. HVCC was the code adopted which legislated that mortgage loan originators would no longer have contact with appraisers and that appraisals would be ordered through appraisal management companies.

The reason that I had hopes that the code would be sunseted was that the house version of the bill did sunset the provisions of the code. However, the Senate bill did not, and the final bill does not. While the bill does call for a study of the provisions of the Home Valuation Code of Conduct and its impact on the housing market, the bill does not eliminate it and it does require that originators not have contact with appraisers. If anything, the final version of the bill actually strengthens the provisions of the HVCC, because HVCC only pertained to loans sold to Fannie Mae and Freddie Mac, while the new Dodd-Frank Wall Street Reform and Consumer Protection Act, as it has been been renamed, applies to all residential mortgage lending.

As those of us who work in real estate are well aware, the Home Valuation Code of Conduct prohibits a loan originator from hiring an appraiser or having any contact with the appraiser. It also prohibits ordering a second appraisal if the buyer and seller disagree with the valuation of the house. The only way to correct a low valuation is to start over with a new lender and a new loan and order a new appraisal. And in real terms, the Home Valuation Code of Conduct means that is a loan is denied for any reason, the appraisal is not really transferable, even if the reason for the denial had nothing to do with the property. This can get very expensive, especially on appraisals for investment properties where additional schedules are required, since the AMCs set the price. A borrower can end up spending close to $1000.00 to get a second appraisal with an operating income statement for an investment property if his loan is denied.

This is one reason that many of us in the lending and real estate communities were hoping that HVCC would be ended in the financial reform bill and replaced with language guaranteeing appraiser independence. But instead, HVCC goes on. The Dodd-Frank Act deals with the problem of HVCC much the way that it deals with the problem of Fannie Mae and Freddie Mac and many other problems--it calls for a study. "12 months after the date of enactment of this Act, the Government Accountability Office shall submit a study to the Committee on Banking Housing and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives, and 90 days after the date of the enactment of this Act, the Governmment Accountability Office shall provide a report on the status of the study and any preliminary findings to the Committee on Banking, Housing and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives."

And what will this study cover? "The study required by this section shall include an examination of the following...The prevalence, alone or in combination, of certain appraisal approaches, models and channels in purchase money and refinance mortgage transactions; The accuracy of these approaches, models and channels in assessing property as collateral; Whether and how these approaches, models and channels contributed to price speculation during the previous cycle; the costs to consumers of these approaches, models and channels, the disclosure of fees to consumers in the appraisal process; to what extent the usage of these approaches, models and channels may be influenced by a conflict of interest between the mortgage lender and the appraiser and the mechanism by which the lender selects and compensates the appraiser...How the HVCC affects mortgage lenders' selection of appraisers; How the HVCC affects state regulation of appraisers and appraisal distibution channels; how the HVCC affects the quality and cost of appraisals and the length of time to obtain an appraisal; and how the HVCC affects mortgage brokers, small businesses and consumers."

Actually the government does not need to spend taxpayer dollars to do a study on this. The mortgage broker community and the appraisal community have all weighed in on HVCC, and the regulation has received more than its fair share of bad PR since it went into effect in May of 2009. Opponents of HVCC organized a petition which received over 100,000 signatures asking that HVCC be repealed last year.

In addition, the Dodd Frank Bill authorizes a second study, which shall include an examination of, "the Appraisal Subcommittee's ability to monitor and enforce State and Federal certification requirements and standards including by providing a summary with a statistical breakdown of enforcement actions taken during the last ten years, and whether existing Federal financial institutions exemptions on appraisals for federally related transactions needs to be revised; and whether new means of data collection, such as the establishment of a national repository would benefit the Appraisal Subcommittee's ability to perform its functions." Last but not least the Dodd Frank Bill will amend RESPA by adding that a new combination good faith estimate and truth in lending form, which is mandated to be developed by the new Bureau of Consumer Financial Protection, may provide a clear disclosure of "the fee paid directly to the appraiser by such company (an AMC) and the administration fee charged by such company (the AMC)."

In other words, watch out. After the Feds complete their study of the models, processes and procedures for appraising properties and whether those models and processes led to the last real estate boom, they can rewrite all of the rules of appraising to make sure that we never have another boom again. And it is apparently okay to make small business owners work for Appraisal Management Companies as long as the consumer is fully aware that much of the money he is paying for his home valuation is going to the AMC taking the order and not to the individual doing the work.