The Home Valuation Code of Conduct (HVCC), which went into effect April 30, 2009, is a bill designed to create a higher level of integrity of work surrounding real estate appraisals. This was part of many regulations imposed following the housing market crash in 2008. Leading up to the crash, home equity was being abused partly because it seemed like a limitless line of credit. Prior to the existence of the HVCC, appraisers didn’t have independence and thus were susceptible to being influenced by banks, borrowers, real estate agents, sellers and loan officers. At its core, the HVCC is a great idea and you wonder why something like it wasn’t in place all along.
The bill itself is long and intensive so here is a short explanation:
An appraisal must be ordered by someone unrelated to the loan production staff associated with the borrower so to as avoid the possibility of earning income resulting from the consummation of the loan. The appraisal order is managed by an independent third party authorized to perform certain actions such as collecting appraisal payments, assigning orders to contracted appraisers and delivering appraisal reports back to the individual that originally placed the order.
At this point, appraisers now have total independence and significant autonomy to perform their professional duties. For the most part this is good. There are tons of great appraisers out there doing quality work. However, there are some rotten apple appraisers out there and unfortunately with the HVCC in play, nobody knows if an appraisal order is going to be assigned to one of them. I’ll expand on this more in a bit. Additionally, the third-party companies, called appraisal management companies or (AMCs), authorized to handle appraisal orders drive up costs by anywhere from 35 percent to more than 100 percent of an actual appraisers invoiced cost. Yes, you read that correctly. A normal residential appraisal as invoiced by the appraiser costs an average of $325 to $350. However, borrowers are charged an average of $450 to $475 because the AMCs are marking up the price for services. Obviously, these companies need to charge fees for services required by the HVCC bill but the markups have been increasing more and more as time passes.
Let me get back to how some appraisers use the power of independence in an unproductive way. In my opinion bad appraisers are those who either deliver sloppy reports with inaccurate information causing underwriting issues or those who think they need to set the market rather than buyers and sellers. The first type of bad appraisers can end up costing time and money. In some cases, delays result by having the appraiser correct errors and these delays can cost money if purchase contracts need to be extended. The second type of bad appraisers, those who feel it’s up to them to set market values, could end up causing the termination of a purchase transaction potentially starting a domino effect involving multiple families. Here’s an example of how:
- Buyer #1 agrees to buy a house for $200,000 from Seller #1 and Seller #1 is using proceeds from this house to buy another one – becoming Buyer #2 from the seller who is Seller #2.
- Seller #2 is using proceeds from the sale to buy a new home – becoming Buyer #3 from a seller who is Seller #3
This domino could go on but you get the picture. So, if the appraiser associated with the transaction involving Buyer #1 and Seller #1 wants to flex his/her power to set the market value of the property significantly lower than the contract value causing the transaction to terminate it affects the lives of buyers and sellers seemingly completely unrelated.
It’s not uncommon for competitive markets to create bidding wars that exceed real estate values and good appraisers do a good job of creating balance where buyers and sellers still have an opportunity to re-negotiate. Bad appraisers seem determined to make a point that they are in control and buyers and sellers aren’t.
While buyers and sellers can’t choose who they want to appraise their home, risk is mitigated by working with mortgage companies that have select appraisers contracted by AMCs. Not all mortgage companies have this kind of leverage. While this doesn’t guarantee anything, it can provide reassurance. To learn more about who Fountain Mortgage works with or more about this topic, call or email Mike.
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268