In an effort not to beat a dead horse this will be short, sweet (?) and to the point.
The head of the FHFA, James B. Lockhart, also the former Director of OFHEO, initiated the Home Valuation Code of Conduct to (paraphrased) "help curtail fraud between loan officers and appraisers".
How will it hurt the home owner/buyer? Two immediate impacts:
1. It currently costs about $350 for a Fannie Mae appraisal including the new MC1004 form which is a new $50 requirement. (Costs are estimates and I am not an appraiser but these are the average prices in the Atlanta area - check with your own appraiser) but Appraisal Management Companies (AMCs) charge as much as $450 or more for the same service and pay the appraiser as little as $175 - so let me ask you this, Mr. Lockhardt, would you do your same job for 1/2 the amount you have been being paid under duress and do it well?
2. Process time. Even though the AMCs may tell you there will be no delays our experience demonstrates appraisal turn times go from about 3 days to as much as 2 weeks. Why should anyone hurry if they are working for half price (the appraisers), getting paid for work they are not providing (the AMCs) and nobody has to answer directly to the borrower?
You see right now the frustrated borrowers and real estate agents have one point of contact - the loan officer - who has absolutely no control over the situation. Underwriting times are already backed up for as much as 30 days after the package has been received. Add 2 weeks of waiting for an appraisal and you're looking at as much as 6 weeks for a closing.
If I were a buyer, agent, seller, home owner, appraiser or loan officer I would be livid about what this ridiculous requirement is doing to the American home buyer/owner/seller. Forget your commission - this is bad for your clients.
I am writing to you to register my opposition to the Home Valuation Code of Conduct which is mandatory on May 1, 2009 for all Fannie Mae and Freddie Mac Loans. Further I implore you to demand the reversal of this regulation. I oppose this regulation by the Federal Housing Finance Agency on the basis of the facts that:
Appraisal costs will immediately increase as much as 35% (from $350 to $450)
Appraisal turn times will increase as much as 400% (from 3 days to 12 days) increasing the time to close a simple, straight forward FNMA or FHLMC home purchase loan to as much as 45 days or longer.
The appraisers will be paid approximately 50% of their current fee to do exactly the same work (they will be paid $175 by the Appraisal Management Companies for the same appraisal services for which they are now receiving $350)
The playing field is not leveled - either force every loan officer to use the same HVCC methods including those who are employed by Federally Chartered banks and lenders or eliminate the regulation
My professional experience in the real estate industry permits me to fully comprehend the impact and the opportunity for abuse of this new FHFA ruling. Please demand the reversal of this decision and an investigation into how this rule has been implemented without your approval. The only entity set to benefit from this change is the Appraisal Management Company industry. Home owners, home buyers and home sellers will be the losers as will the nation through a further slowing of the economy as driven by home sales, new home sales and home refinances.
Sincerely,
Ken Cook - Web coder (I write the programs that make the whole world zing!) (678) 439-8683 Anything your mind can conceive I can create - online that is!
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Congress is simply "protecting" the consumer! The fact that no one is protected is irrelevant! It sounds good! You can safely bet the juice is already flowing from the AMC's!
Ken... I am soooo glad that you wrote about it. Even though we have known about it for a while, and that I have a handle on this, I am just not good for boring stuff... lol Seriously, you did a great job of writing this blog and it was easy to understand. And you make an excellent point about costing more and who does this benefit... not the borrower. Nice job.
Yikes! This is something that is going to get ugly. I don't understand why an appraiser would do the same job for less money, seems as though appraisers are going to do a half @$$ job. Why should they care how long or how good they do thier job, if they get paid half the money! Ridiculous!
Ken, I'm involved in this hell right now. The worst part is that nobody can talk to one another directly any more. It's been weeks now waiting for the appraisal from somebody 70 miles away from the target property. Rich
Great summary of the certain impact - increased cost, increased delays. Though I have heard a fee of $150 to local appraisers.
Lack of transferability of the appraisal is also a problem, as will likely be appraisal quality. I spoke with one AMC, they were very defensive about discussing the fee to the local appraiser.
There is a reason that few use AMC already.
Bryant, FHA, RD, VA appraisals are not effected as far as I understand things.
All this to direct payment to the AMC's that were involved in the original suit.
Hey Ken, Great post, but for the record those free pencil searches, have beena violation of USPAP. for as long as I've been in the appraisal field! That was one of the reasons for the hearings in the first place, that lead to that pile of crap they call HVCC.
Hi Ken -- While there are very well meaning people crafting legislation, sometimes they just get it wrong, and I'm not a fan of anything that isn't proven to actually work. While I think the intent of MC1004 is solid, I wonder about its implementation at the individual appraisal/appraiser level.
Ken, I did a post on this several days ago. People need to realize exactly what this does to the struggling housing industry. Is the government really trying to help or ....
Ken - Great post! I just experienced this first-hand last week. The appraiser visited the property on a Monday and didn't get the report to us until the following Tuesday. To make matters worse, the appraiser didn't even do his due diligence to make sure the information was correct. Every single comp used in the appraisal was incorrect -- from the # of bedrooms to the square footage. The appraiser actually used the property we were purchasing as one of the comps! Incredibly frustrating.
Ken I'm realing glad you posted this so everyone will become aware of how big of an impact the new changes will have on our business. My mortgage connects have been talking about May 1st as being "dooms day" for these new changes. As if we don't already have enough hurdles to climb!
You know I think the first part of your post mirrored my own (and my clients) situation just today! So darn frustrating, thanks so much for making so many aware!
Ken, thank you for making us aware of this new law. There are others coming down the pike, too. They are all in response to loan fraud BUT cause more problems for home buyers than they help.
Ken, I heard about this from a local loan officer but didn't clearly understand the impact until your post. Thank you and I will forward it to our office manager.
As an appraisal shop owner, I am disgusted by the implementation of the HVCC. I agree with most of your post, however regarding "Loss of service communication such as "Pencil Searches" or free pre-evaluation cost estimates will be lost" - the way that most appraiser's handled this was illegal, as they failed to create and maintain a work file as required by USPAP. The poor business practices of some appraisers and some loan officers/mortgage brokers are why we are now in this situation.
Ironically, all of this began because of the poor practices of some Appraisal Management Companies(AMCs), and now most secondary market lenders are choosing to utilize AMCs to meet the requirements of the HVCC.
FHA does not fall under the authority of the HVCC, so there are still alternatives.
As an independent real estate appraiser, I have been doing work for several AMC's for the last 3-4 years - quite frankly, I have been willing to accept reduced fees so I did not have to perform free "pencil searches" or "comp checks" for mortgage brokers such as yourself, or be harassed when an appraisal did not meet your needs or expectations. On a per-hour basis, I make about the same as appraisers who perform these free services. Some of my fellow appraisers have to perform three to five free "comp checks" for every appraisal ordered if they work in declining areas.
The unfortunate consequence of the HVCC is that I will be losing my "good" mortgage broker clients due to the unethical actions of the rest of the industry.
Thank you, this is the second blog post I have read about this problem. I know there have been problems but let's not throw the abay out with the bathwater. This is a call to action. We need to tell Congress that if you turn the screw to much it will strip.
Actually, USPAP, the rules appraisers are supposed to live by, don't allow "comp checks" They NEVER have since appraiser licensing in 1989. This is for many reasons, one of which is to stop the mortgage broker from checking which appraiser will come in the "highest value" especially on refis. This is part of what got us into this mortgage mess we are in now! I can tell you what at town is selling for, such as iberia is selling between 110 and 490. That doesn't really help you does it? If you need an appraisal, order one. And PRAY that you have an HONEST appraiser who will give you a true value for the property so when you decide whether or not to make the loan, you have accurate information and therefore, less risk! Everyone just wants everything to close, but everything out there shouldn't close!
As for the HVCC, it DOES NOT require the use of amc's. Just distance between the loan originator and the appraiser. Staff not paid based on closed loans can order appraisals. Personally, I won't work for AMC's and do the same job for a lot less money. I'd rather do something else to earn a living. If all the appraisers did the same, things would change if no one would accept this current pay arrangement.
As for me, I still do a little mortgage work, and more private work.
The HVCC does not require the use of AMCs but the major investors are using that method in leiu of other options. The HVCC says it will allow "compliance officers" but the big investors will not - they require AMCs.
I'm not an appraiser but in my opinion requiring a full, blind appraisal is no different than charging a non-refundable origination fee upfront regardless fo whether or not they get the loan - or charging $350 to have groceries delivered with no guarantee you'll ever see them. On pencil searches I did not know that was a national rule and thought it was only Georgia and Florida - but I don't lend in other states so I would not know. I suppose some appraisers must be willing to break that rule because I read about it all over the internet.
"This is part of what got us into this mortgage mess we are in now!" What got us into this mess we're in now is loose lending guidelines, looser underwriting guidelines and runaway lending practices. If any appraiser EVER overstated value for ANY reason then that appraiser did the wrong thing. Sending an order to an appraiser with the value requested on it is built in to the Fannie Mae appraisal order form. The new form to be delivered to the appraiser, from my understanding, does not have this value stated.
Great coverage on a great topic! Thanks! Great post.
Two things I would add, and didnt read EVERY comment left, so if I am duplicating, sorry....
One thing I WOULD add to this terrible new situation, is that we are going to be FORCED to lock loans in some cases, for longer periods of time....In the end, the customer pays for this...so let's say we have to go from a 30-45 day lock, at an average hit of .125% on a 200k loan. That is an additional COST of $250.00 to the borrower. Some funders/lenders, charge .25% which would make it even MORE!!!
In addition, it also doesnt buy US as LENDERS much time to react to issues that may ARISE with the home...such as a bad railing, gutter etc...or repair of ANY nature! Not only is it OUR timing issue, but because many appraisers have gotten OUT OF THE MARKET, the ones that are left, (EVEN FRIENDS OF MINE), are 2 weeks out or more....so instantly, THEY ARE BOGGED DOWN by 3rd party companies ordering appraisals!
To further complicate it, here is what arose for me today. My main "go to" appraiser said, she is so busy, she doenst have TIME to sign up with all of the 3rd party companies. Let's see, from an appraisers standpoint, you would THINK getting less money for 5 appraisals per month, that you wouldnt ordinarily have is hard on the ego, but yes, good on the pocket book! I would rather have 1500 for 5 appraisals, than 2000 and no appraisals!!! Appraisers are HARD to change tho....and difficult to convince, because they truly have gone thru SO MUCH schooling, training, and continuing education! I can feel their pain...but they are going to have to accept change as well!
yes this is definitely a cause for concern. fortunately this doesn't apply to government loans, which is the majority of my business, but i've heard some real horror stories from people that have used this system already with the handful of lenders that have required it before 5/1
Ken - Right on the money... This is just another overreaction to the subprime crisis that makes the process of obtaining a loan more expensive and more time consuming for the average consumer. We already have a two step process anyway with appraisals being reviewed by the lender's underwriters and by the PMI underwriters. Both underwriting groups can and now regularly do flag appraisals for further review. Now, we are going to compound this problem by adding a third layer of government mandate review. It doesn't make much sense to me. If the goal is eliminate the possiblity of fraud and collusion between loan officers and appraisers, then it seems like the lenders (or investors) should simply set higher criteria for who is eligible to perform the appraisal and be more restrictive as to who makes the approved list. Add to the mix - require random reviews of files (including files where the borrower is in default) and take action against incompetent or corrupt appraisers. More regulation and more oversight isn't the answer.
I had an interesting conversation with a manager at a large lender who is also a client. She was the manager of the department that bought loans and packaged them for the secondary market. She redflagged the quality of the loans early on and was told that they had to purchase $XXX amount of loans each month. These lenders were looking at the profits and didn't care about the quality of the loans. Didn't most people know that "stated income" loans were really "overstated income" loans? Not a great shock, right? The answer is to eliminate these lender bailouts and allow lender with loose underwriting standards to fail. Instead, we bailout the big investors and punish the average homeonwer with good credit - makes perfect sense to me.
You're right on all accounts. The worst result of HVCC is that any real estate recovery is going to be significantly slowed by this mandate. Besides not know what the appraiser is thinking before he or she goes out to the property, there isn't an appraiser in the country that will make the extra effort to support the sales price, when they have no interest in the outcome. There are positive aspects of it, but the disadvantages outweigh the advantages. Most of the extra fees are being absorbed by the AMC's, and the end result is lower quality appraisals, and many experienced appraisers leaving the business. I'm still hanging in there, and I hope that I can count on agents like yourself to remember me when you need to order an FHA appraisal. Great blog!
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We are livid and consider this just another case of the government take-over of our business, all business.
Their goal is to destroy the industry in order to save it.