Friday, February 4, 2011
It seems hard to believe that it has been close to two years since the enactment of the Home Valuation Code of Conduct which essentially made it impossible for loan officers to hire or even communicate with appraisal companies. If you recall, the Home Valuation Code of Conduct came out of a deal made between Andrew Cuomo, then Attorney General of New York, and Fannie Mae and Freddie Mac. Cuomo promised to drop an investigation into the two agencies if they would sign the code and in the future essentially accept only appraisals ordered through appraisal management companies--at least in the world of mortgage brokers.
Protests immediately began as the rule was enacted. The summer of 2009 was truly awful as one deal after another imploded because of bad appraisals. (One title officer told me that she had a stack of files in her office that looked like the Leaning Tower of Pisa that were not going to close because the properties did not appraise.)
Now, close to two years later, HVCC is a thing of the past--sort of. The Dodd Frank bill abolished the Home Valuation Code of Conduct in favor of new strict appraisal independence guidelines. And what was the result? Basically the Home Valuation Code of Conduct has been codified into Federal law and expanded to include all real estate transactions, not just those secured by loans that are sold to Fannie Mae and Freddie Mac.
For example, during the months that HVCC was implemented, if I closed a loan through a portfolio lender who was not going to sell the loan to Fannie and Freddie, I could hire the appraiser. This was very useful, particularly in construction financing transactions that involved sets of plans, purchase contracts for land and construction contracts for the custom home. Custom homes can be very difficult to appraise, so it was comforting to be able to turn these projects over to seasoned appraisers I had worked with for many years.
The same principle was true for jumbo loans. Before the market meltdown, I did quite a bit of jumbo financing. Over the last two years, the lending sources for jumbos have largely dried up, but there is still a need for financing for these properties. Since El Paso, Texas is not eligible for conforming plus financing, any loan over $417,000 is a jumbo, and it was reassuring to be able to hire an appraiser who had experience with appraising larger properties in our market.
Under HVCC, exterior-only property inspections (Form 2075 appraisals) were not considered to be appraisals because they did not contain a value. Because of this, I could hire a local company to do these. By being able to send business to the local appraisers I knew on these types of transactions, I was able to support their businesses and also to provide better service to the borrower, since typically a telephone call to the appraisal company followed by a faxed request for the 2075 could result in same day service on this report rather than the 5 days that an order through an AMC can take.
Today, the new appraiser independence guidelines have done away with each of these opportunities. No loan originator or mortgage broker can have any contact with any appraiser regarding any report on any type of residential real estate transaction. This includes the 2075, which now must be ordered through the AMC. Our office is about to do the our first one time close construction loan under the new guidelines, and I will be holding my breath to see if the appraiser chosen at random is able to appraise this custom construction on the borrower's lot.
To be fair, the Dodd Frank bill did correct a couple of real problems with the Home Valuation Code of Conduct. For one thing, the bill mandates that appraisers be paid fair market value for their work. This is essential, because the Home Valuation Code of Conduct allowed the Appraisal Management Company to set the rates for the appraisers and pay seasoned men and women almost nothing for their services. But the down side for the consumer is that the costs of appraisals have risen. An appraisal that used to cost $350.00 now costs $400. A review typically costs as much as a full appraisal. And supplemental forms, such as rent comp schedules and operating income statements are now very expensive. Before HVCC, a full appraisal with a rent comp schedule and an operating income statement cost around $450.00. Today that same report costs around $600.00. That is a big difference for the consumer. Even the simple form 2075 costs more--when ordered directly through the appraiser it costs about $160.00 whereas through the appraisal management company it costs about $200.00.
The second problem corrected by the Dodd Frank rule is the problem of being able to transfer an existing appraisal. The appraisal independence rules allow for the transfer of appraisals on loans that have not closed between lenders. This is also huge since one of the key problems under HVCC was that appraisals could not be transferred so if a borrower needed to change lenders for any reason, he was stuck with the cost of a new appraisal.
Interestingly, the new appraisal independence rules specifically do not allow an appraisal for a closed loan to be used more than one time, even if it is unexpired. If the first transaction closed, a new appraisal must be ordered.
What galls me about the Dodd Frank bill with regard to appraiser independence is the same issue that galled me about HVCC. It bothers me that the government can go into an industry and legislate that various industry participants do not have a right to communicate with each other. While I understand that appraisers need to be able to arrive at values independently and free of coercion, to require that there be a "wall of protection" between appraisers and loan officers to me flies in the face of entrepreneurship and business relationships. The days of networking and building a business through contacts is over for the appraisal industry--the only contacts that matter are the ones at the Appraisal Management Companies that place the orders. That is anti-business and certainly against all principles of free enterprise.
There is a saying that if you put a frog in hot water it will immediately jump out, but if you put the frog in cold water and turn up the heat you can boil him to death. As an industry we are now used to the appraisal independence rules now, but that does not mean that ultimately those rules are good for businesses or good for the consumers. It only means that the water around us has been heated slowly and evenly for a long enough period of time that we are no longer aware of being cooked.
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