Home Valuation Code of Conduct: Important For Investors

Today marks a major change in the lending landscape and the way loans are sold to Fannie Mae & Freddie Mac.... Specifically, how they are appraised.

If you have not heard of Home Valuation Code Of Conduct (HVCC),just ask your favorite mortgage broker about it and more than likely their response will be something like:

&$#@%^&%$#^%$#@#$%^

(sorry, but can print what they really will blast you with)

In short, this change is designed to fix the evils of the past.

As always, there are good and bad sides to every change. We will explore the good, bad and ugly of this new approach but first, let's synopsize what it is about.

WHAT IS HVCC (Short Story)
So what does the code say? Basically, it's that the people responsible for originating mortgages can have nothing to do with the appraisal process.

In addition, the code also:

* Prohibits lenders and third parties from influencing or attempting to influence appraisals.

* Requires lenders to ensure that borrowers get a free copy of appraisal reports at least three business days before closing.

* Allows lenders to have in-house appraisers, so long as they're completely independent of sales staff and their compensation does not depend on their estimates or on loan closings.

* Requires lenders to test a randomly selected 10 percent (or other statistically significant percentage) of appraisals and report any problems to Fannie Mae or Freddie Mac, which may force lenders to buy loans back from them.

* Requires lenders to report appraisal misconduct to applicable state agencies.

You can download a copy of the HVCC at: https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/hvcc.pdf

WHY IS HVCC GOOD?
Let's face it, the appraisal business has been a bit "rigged" over the last several years.

In short, only appraisers that could "get the deal done" were used on a repeated basis by mortgage brokers, realtors, and or builders. It only makes sense that this is the way the system worked. If you were a realtor, or even if you were a new home buyer, the last thing that you want is for your appraisal to come up short and the deal fall apart.

Since appraisals are somewhat subjective, the appraisers that always got called were those where the subjectivity worked out in favor of the deal.

However, many appraisers felt very pressured to make the deal work..... their future business counted on everybody walking away happy. Of course we are now seeing some of the consequences of that type of approach with our current housing and mortgage crisis.

WHY IS HVCC BAD?
Because now your purchase or sale is a crap shoot.

Why?

Simply because appraisers will be pulled out of a "blind pool". From my personal experience, only about 20% of appraisers are good at their profession (you know, the ole 80/20 rule).

So you now have an 80% chance of a mediocre appraiser being assigned to your appraisal. Are they really capable of determining the value? I am skeptical.

In addition, most the incentives for the appraisers are now set up to appraise low..... The safe play is to come in BELOW what you may be thinking is actual value.

CONSEQUENCES
HVCC will be implemented May 1, 2009. Many people believe, myself included, that this is going to severely disrupt the home seller market, and investor market, for a period.

Everybody's major hope is that soon, tweaks will be made into something that is workable for all in the industry.