Thursday, October 8, 2009

Congressional Hearings - HVCC Problems Exposed

Early this morning, we posted some information about a Congressional Hearing on "The Future of the Federal Housing Administration’s Capital Reserves: Assumptions, Predictions and Implications for Homebuyers", and mentioned at least one of the several witnesses will discuss the Home Valuation Code of Conduct (HVCC).

It turns out that one other witness at that hearing, Boyd Campbell, brought up changes to the FHA Appraisal process in his written testimony and HAVOC in verbal testimony.

FHA has also released mortgagee letters on appraiser independence, effective January 1, 2010. We support FHA’s language related to geographic competence, especially as it relates to the use of Appraisal Management Companies (AMCs). FHA does not require lenders to utilize AMCs, and reinforces the importance of geographic competence. Consumers and REALTORS® have encountered significant problems with appraisals when the appraiser is not familiar with the community in which the home is located. FHA’s mortgagee letter states that lenders and appraisers are both responsible for the quality and accuracy of the appraisal. FHA states that the lender is responsible for determining whether an appraiser’s qualifications are sufficient prior to assigning an appraisal. Appraisers are reminded that USPAP applies to all appraisals performed for properties that are security for FHA. In addition, FHA’s letter states that if the lender orders an appraisal through an AMC or another third party organization the lender must ensure that specific guidelines are followed to ensure the FHA appraiser is compensated appropriately and that the fee charged to the consumer for the appraisal report is consistent with the market rate for appraisals.

The letter also provides guidance on the subject of appraisal portability. NAR believes it is important for borrowers to have complete flexibility in choosing a lender, and should not be hampered by having to repeat an appraisal simply because they switched lenders. NAR feels strongly that consumers should not be required to pay excessive fees for appraisals, nor be subject to appraisals conducted by appraisers who are not familiar with their market. Mortgage brokers and lenders underwriting staff will be prohibited from ordering the appraisal. This will create a firewall between lending staff and the appraiser and enhance the independence of the appraisal process. To further support the independence of appraisers and to ensure uniformity in the real estate industry we have called on FHA to work with the GSEs to established a combined frequently asked questions (FAQ) document that will be codified in existing appraisal policies. In a recent meeting, FHA Commissioner David H. Stevens has asked his staff to begin discussions with the GSEs to further explore this recommendation. We support these changes by FHA.

The witness list included Joseph Confora, Broker Owner of Century 21 Selmar Realty, on behalf of the National Association of Realtors®. His testimony touched on a number of subjects, and included quite a few comments and recommendations concerning the HVCC:


The tax credit is a good thing, but a major stumbling block for consumers and for practitioners is the current operation of the property appraisal process. In fact, current appraisal practices threaten to undermine the efficacy of the tax credit. NAR supports the independence of appraisers and the integrity of the appraisal process. We commend Attorney General Cuomo and both government sponsored enterprises (GSE), Fannie Mae and Freddie Mac, for their efforts to address appraisal fraud in the mortgage industry. We wish, however, to express concerns about the Home Valuation Code of Conduct (HVCC or the Code) they have issued. We support its intent to address appraisal fraud, but we have serious concerns about the implementation and adverse unintended consequences it has had on the real estate industry.

The HVCC has been in effect for five months. The Code is causing delays in closings and even canceled sales, which lead to artificially low existing home sales. While our monthly index of pending home sales shown steady growth in potential home sales for seven straight months, NAR’s Chief Economist, Lawrence Yun, notes that not all of these contracts are turning into closed sales. He notes that “The rise in pending home sales shows buyers are returning to the market and signing contracts, but deals are not necessarily closing because of long delays related to short sales, and issues regarding complex new appraisal rules.


HVCC May be Increasing Costs to Consumers

The HVCC agreement reached between the Attorney General Cuomo and the GSEs, and approved by Director Lockhart, does not address the costs of the real estate transaction. Appraisers now must consider their obligations under the Uniform Standards of Professional Appraisal Practice (USPAP) and the Appraisal Foundation and the additional burden of complying with the HVCC. Higher costs may also be an issue for lenders. The creation of a new set of standards to follow and a new oversight organization may lead to increasing the cost of the real estate transaction. According to NAR survey data, the cost of the appraisal has increased by as much as $100 for consumers.


AMC Regulation Improving at State Level

Because the HVCC requires mortgage brokers to arrange for appraisals through third party organizations, AMCs now have an increased role in the real estate appraisal process. In fact, the number of our appraiser members obtaining more than half of their assignments from AMCs increased from 13 percent to 40 percent after May 1, 2009. These AMCs are giving appraisers assignments in areas where they lack geographic competency. For a variety of reasons, appraisers may feel compelled to take these assignments. More than 70 percent of Realtors responding to our June survey report appraisers lacking geographic competency for their assignments. Recently, Fannie Mae, Freddie Mac, the FHFA, and FHA have all reaffirmed the existing geographic competency rule found in the Uniform Standards of Professional Appraisal Practice (USPAP). While the geographic competence problem existed prior to the implementation of the HVCC, the problem is exacerbated by the increasing prominence of AMCs since May 1, 2009.

NAR believes there is a critical need for regulation at the state level. Aside from geographic competency, our survey found that appraisers have less time to complete an appraisal report and the quality of appraisals is deteriorating. Perhaps most importantly, both Realtors and appraisers report that overall fees to appraisers are declining, so the cost of an appraisal is increasing for the consumer.

and one of the best points!

Lender-Owned AMCs Cause Conflicts of Interest

The proposed HVCC would have barred lenders and affiliates of lenders from relying on an appraisal report obtained by, or through, an appraisal management company (AMC) that is more than 20 percent owned by the lender or affiliate of the lender. The final Code does not limit lender ownership of AMCs. We disagree with this result. NAR believes that lenders should be prohibited from using an appraisal report from an AMC where the lender or the lender’s affiliate maintains any ownership stake. Allowing lenders to obtain appraisal reports from AMCs where the lender has a stake in ownership does not meet the goal of the HVCC to assure the independence of the appraisal process.

There is much more in the written testimony. You can read it all right HERE.

In my view, there's quite a bit to like about this testimony from the NAR representatives. Nevertheless, there is room for improvement. After all, this hearing was before the Committee on Small Business. There should have been some discussion of the adverse impact of the Home Valuation Code of Conduct on thousands of small, independent appraisers and appraisal companies. Soon, the data will be available about the number of appraisers leaving the profession, primarily because of HAVOC.

Looks like Appraiser Active will have to get busy and compose some talking points for the next hearing.


Dennis Norman said...

Frank, Thanks for reporting on today's meeting...I agree with you that there needs to be more attention given to the nightmares HVCC has created...NAR is talking about it but needs to talk in a louder voice and bring more attention to the problem...another organization, Fix Housing First, has been pushing to get the homebuyer tax credit program extended and expanded and has done a great job of providing real life examples of how the credits have worked..It would be good to see NAR do the same thing with HVCC...gather real life stories from agents on deals that have been lost, buyers that have been unable to purchase a home, sellers that have not been able to sell, all a result of HVCC...this would hopefully open some eyes on the hill.
Keep up the good work, Dennis

Unknown said...

I alos beleive that it is worth noting that the quality of an appraisal or the expereince of the appraiser is secondary, at best, to obtaining the lowest fee. This is the primrary or sole agenda of most appraisal management companies. It should also be noted that the increase in appraisal prices to consumers has nothng whatsoever to do with appraisers, who are, by an large, getting less for their work. It is the AMC's, takig as much as 40% of the fee (see Appraiser Loft) that is sticking it to the consumer.

Alan Rutherford
Grants Pass, Oregon