On May 1, 2009, a new set of rules regarding the processing of appraisals for Fannie Mae and Freddie Mac loans went into effect. The Home Valuation Code of Conduct, or HVCC as it is known, was intended to curb fraudulent mortgages. This new code was in response to an investigation conducted by Andrew Cuomo (the Attorney General for New York) into the appraisal practices of Fannie Mae and Freddie Mac (GSEs or Government Sponsored Entities). Basically, Attorney General Cuomo agreed to stop the investigation if Fannie Mae and Freddie Mac would change their appraisal process.

The HVCC is an effort to clean up the mortgage industry. Although there are many good initiatives in this new code, there are many unintended consequences adversely affecting home buyers, home sellers, mortgage brokers, agents and appraisers.

Any person that is compensated on a commission basis when a loan is closed is strictly prohibited from communicating with or selecting an appraiser. All the business relationships that have been developed over the years based on professionalism, quality and timeliness are now meaningless. Instead, appraisers are chosen from a preapproved list or from an independent Appraisal Management Company.

Home buyers are adversely affected because of the increased cost of appraisals. Since appraisals are in the lender’s name, if a home buyer changes lenders, a new appraisal must be requested. This increase in time and cost to the mortgage process may trap some home buyers with lenders who are not currently meeting their needs. In addition, buyers may have longer rate locks or need to extend existing rate locks.

Home sellers who have agreed on a price to sell their home are now negatively impacted by low ball appraisals. If an appraisal comes back below the agreed-to price, the sellers can appeal the appraisal or lower their sales price. The latter may not be an option, so the sale may fall apart. In fact, the National Association of Realtors, The National Association of Home Builders and the National Federation of Mortgage Professionals have pointed to issues in the new appraisal process as a reason for new and existing home sales in May falling short of expectations.

Finally, appraisers are the ones that have been most adversely affected. Appraisers are forbidden from ANY communication with mortgage brokers, loan officers, agents or any others paid on commission once a transaction is completed. Basically, appraisers are prohibited from communicating with their clients. No other industry has this kind of restriction. In addition, many independent appraisers will need to join Appraisal Management Companies to insure they are chosen to work. AMCs typically take approximately 40% of the cost of the appraisal thereby reducing an appraiser’s income. The most important thing to know about AMCs is that they are NOT regulated.

CNBC interviewed several agents across the country regarding the low ball appraisals. Agents and brokers believe that 1 in 4 transactions are being adversely affected by the Home Valuation Code of Conduct. Therefore, NAR (National Association of Realtors) has requested that HVCC rules be suspended for 18 months to cut down on these negative results

The truth is that appraisers are caught between lenders and regulators who want conservative appraisals and buyers, sellers and agents who just want to conduct business. Lenders and regulators want foreclosures and other distressed properties to be used in the appraisals. Buyers and sellers just want to buy their dream home or sell their existing home and move on. Prior to all this free money in the mortgage industry, a home was worth what someone was able and willing to pay for it. Oh, how I long for the good old days!

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