In the wake of the most recent housing bust that fueled the economic recession we are still struggling to overcome, much attention was focused on the appraisal process and the potential it had for fraud. According to some, lenders could influence appraisers by providing an incentive to hit specific value targets. Appraisers who were willing to ‘adjust’ the numbers could be rewarded with a stream of future work orders, leading to more revenue. While the extent of this issue is unknown, the efforts to stop it have created a new set of problems.
WHAT IS THE HVCC?
[Please note: The Home Valuation Code of Conduct (HVCC) was replaced by a program known as Appraisal Independence Requirements (AIR). The basics of the two programs are essentially the same. We refer to HVCC throughout this article, but the comments would refer to AIR as well.]
The Home Valuation Code of Conduct (HVCC) was implemented to help prevent appraisal fraud. The HVCC became a part of the Dodd-Frank Act and is now a standard policy for appraisals conducted throughout the country. On its face, the HVCC put a buffer between lenders and appraisers, eliminating the ability for loan officers to interact directly with appraisers and removing the potential for fraud. In reality, the new policies have hampered the quality of appraisals and opened the door for a new kind of fraud.
HOW DO PROFESSIONAL APPRAISERS VIEW THE HVCC?
We spoke with Andy Coats, a veteran appraiser with 23 years of experience who owns Sterling Valuation, a residential appraisal firm in Austin, Texas. During our conversation we discussed the HVCC and the implications to his profession and to the entire residential real estate market. In full disclosure, Sterling Valuation is one of the appraisal companies used by Mission Mortgage of Texas within our pool of qualified professionals.
Coats first addressed the idea that the new HVCC rules for becoming a certified appraiser is creating a shortage of quality professionals in the field. While some have pointed out that the degree requirements (currently an Associate’s degree is mandatory and it is expected to require a 4-year degree at some point in the future), the 250 hours of classroom training, and the 2500 hours of trainee experience is too much to handle within the current two year time limits. Coats disagrees that this is the fundamental problem with HVCC and points to something much more troubling. HVCC has depreciated the perceived value of a quality appraisal, according to Coats, which will lead to fewer people electing to enter the profession.
The HVCC and the Dodd-Frank Act do not require, but encourage, lenders to use Appraisal Management Companies (AMC) to avoid any loan officer-appraiser inappropriate communication or to avoid any pressure on the appraiser to hit a specific value number in their assessments. Here is what Coats has to say about the HVCC:
In my opinion….
The issue has nothing to do with the higher level of qualifications and the sponsored ‘trainee’ period. The issue is the limitations on business development of an appraisal practice. The HVCC and the Dodd-Frank act do not require, but encourage lenders to use AMCs to avoid any loan officer-appraiser inappropriate communication or to avoid any inappropriate pressure on the appraiser to hit a certain number.
1. Cheaper, rather than better.
The AMCs do not seek out the most qualified appraiser, but rather the cheapest. So, appraisal quality is hindered tremendously. What the lender receives is not a quality appraisal with a good reconciliation to value and necessary narratives to explain how the estimate of market value was derived. What the lender receives is an appraisal with all of the correct boxes checked so underwriting can quickly sign off on the report. But often many items are incorrect or omitted due to the limited knowledge and experience of the cheapest appraiser the AMC could find, which just adds more profit to the AMC and the loan decision is made based on an inadequate appraisal report.
Currently, the amount of the appraisal fee is listed on the HUD Settlement form provided at the closing table of every residential transaction involving a mortgage loan. On that form there is one fee listed for appraising the subject property. AMCs, therefore, are rewarded for using the lowest priced appraisers they can find because they keep the difference between the fee listed on the HUD and the fee charged by the appraiser. The cheaper the appraiser, the more profit for the AMC.
2. Promoting Quality from Both Sides
To build a successful appraisal practice, the appraiser needs to develop a relationship with a variety of different lenders. This relationship should be built on integrity and knowledge of the appraiser, quality of the appraisal work provided and the timeliness of the appraisals delivered to the lender, NOT the ability of the appraiser to hit the magic number, overlook repairs or omit any mention of other detrimental conditions to the subject property. Sure, there are lenders out there who seek out appraisers willing to provide reports that ensure the ‘deal gets done’. But a large majority of lenders actually want a credible appraisal with accurate data in order to make a quality decision on the final loan approval. These are the lenders that quality appraisers seek out to develop their successful appraisal practice.
3. No Logic to the Law
In regards to the AMCs… this type of structure would never be allowed in other fields. Example: If you needed a mechanic, you would never just take your vehicle to an AMC warehouse, pay their AMC fee and let them decide who works on your car, especially if they were determined to find the person to do the job the cheapest regardless of their knowledge. No, you are going to want your mechanic, the guy you trust, the guy who has proven himself to you previously. Apply this same business structure to the medical field…. it would never be allowed. Yet, we are allowing this to happen when it involves the single largest investment that most people will ever make. There seems to be no logic to the law.
4. Eliminating One Fraud, Allowing Another.
Lastly, the HVCC/Dodd-Frank Act was implented to eliminate the undue pressure the “poor, defenseless appraisers” were receiving from the “brutal strong-armed loan officers” to hit a certain number, which was resulting in inflated appraisals. My stance has always been if the loan officer requests a certain value and as an appraiser I give in to that pressure and provide a fraudulent appraisal, then the burden is on me, not the loan officer. I’m the professional, it is my reputation and it is my integrity. Something needed to be done about the pressure that appraisers were receiving. Unfortunately, it seems too many in my profession were willing to sell their souls for $400 a pop. But, the HVCC/Dodd-Frank has created an entirely new problem that will potentially be more damaging than the original issue they were trying to eliminate.
Instead of pressure on appraisers to hit certain numbers, the HVCC forces appraisers to continually compete for a limited pool of money by offering their services for lower and lower amounts. Meanwhile, the AMCs make more money each time an appraisal fee goes down. The consumer, the unknowing homebuyer, receives no benefit and is actually placed in the more difficult situation of having the least qualified appraisers handling a greater percentage of valuations.
A better solution would be the full disclosure of both fees – the fee paid to the appraiser and the fee paid to the AMC. This would allow consumers to see and question the amount AMCs are getting for their role as the middle man.
As a 23 year appraisal veteran who has developed a quality practice, I obviously have an opinion on this situation and I loathe the folks in my profession who damage the reputation of the rest of us who strive for quality and integrity in our field. My hope is for a fair and just response that would encourage quality appraisals without passing all of the profit the third-party AMCs.
Mission Mortgage would love to hear your thoughts on the HVCC and the Dodd-Frank Act and the role of appraisers in the future of residential housing transactions. Please feel free to comment using the space below.