Home Valuation Code of Conduct

Never before has a change in the housing industry impacted so many participants and caused unsettling debate. The Home Valuation Code of Conduct ( HVCC),  is the result of a joint agreement between the Agencies'  Fannie Mae, Freddie Mac, Federal Housing Finance Agency, and New York state attorney general Andrew Cuomo, to improve the quality and accuracy of the appraisal process.  While the intent was great - protections for homebuyers, mortgage investors and the housing market - honest industry participants and homeowners are being punished in an effort to thwart the efforts of the bad apples that created our current housing challenges.

History of HVCC In a 2008 announcement, Freddie Mac and Fannie Mae stated they would no longer purchase mortgages from sellers that do not adopt the HVCC effective May 1, 2009. Since FannieMae and Freddie Mac purchase 85% of all mortgages being originated today, this is a significant policy that changed property valuation processes for almost all lenders.  

Fans of HVCC  

Appraisal Management Companies (AMC) have much to gain from this change in valuation process. The AMCs were not widely used by lenders before the HVCC because they added additional cost and processing delays.  Now that many lenders are choosing to outsource the compliance to HVCC, new AMCs are being formed, and existing AMCs are busy.  

Underwriters (who thought it was a good idea to restrict communication between commissioned sales people and the valuation process) are now realizing their worst fears: many appraisers do not understand how a lender perceives collateral risk.   HVCC has actually increased the number of lender phone calls back to the appraiser asking for clarification on items found on the report.   I was not sure if I should put

Appraisers in the fan or critic group.   In theory,  they have the most to gain because they are no longer being "coerced" into supporting phony values. However,  I have yet to interview an appraiser that thinks the HVCC was a good idea.  Communication between originator and appraiser is now restricted, making compliance with HVCC  difficult at best.   The Appraisal Institute has published an article called HVCC Myths & Realities .   This document summarizes  the formal statement issued by the appraisal industry in support of the code.  

Lender operational staff responsible for Quality Control love HVCC.  Most quality control personnel sit behind a desk with limited knowledge (and some stereotypes) about how loans are originated.  While Quality Control is important, the way it is actually carried out has proven ineffective at preventing this housing crisis (subject matter for another article).    

Critics of HVCC  

Realtors  are having difficulty selling homes under the new code and are seeking a 18 month moratorium to get us thru the worst of the housing crists.  In article written by Inman News, the National Associaton of Realtors cheif economist Lawrence Yun says "faulty valuations" prevented many home buyers from securing mortgages in May, citing the HVCC as one of the appraisal issues that are stifling home sales.   

Homebuilders are having some difficulty with HVCC. The National Association of Home Builders  says the use of foreclosures and short sales as comparable properties for valuation purposes is inappropriate and has put a damper on new-home sales.  Their argument is that a homebuyer that wants a new build is not the same buyer that wants to purchase a resale.  

Experienced Originators know that there are many things that can go wrong during a transaction, and want to anticipate all possible variations to set expectations for everyone involved. When you cannot talk to the appraiser about trends in the neighborhood prior to the report there are many surprises.   Enough said.  

Finally,  there are the positions taken by mortgage brokers and mortgage bankers on HVCC. Brokers and bankers are not on the same page. The Mortgage Bankers Association  (MBA) statement on HVCC  differs from the National Association of Mortgage Brokers (NAMB)  statement  .  The NAMB believes they can police appraisal fraud within current regulatory and operational processes.  The MBA wants oversight and standardization that applies to all.  

Homebuyers and Homeowners - Which group do they fit into,  Fan or Critic?  Hard to say because homebuyers want the lowest price when purchasing, and the highest price when selling.  

The lending community needs to protect consumers from the self servicing interest of commissioned sales people, and we need to get this right.   Over the last decade, lenders have given homebuyers exactly what they wanted without the financial literacy and prudent risk management advice that should have gone along with it.   I don't know if there will be a HVCC moratorium or not. But we owe it to our communities to tweak the Code so it is fair for everyone.  Only then can we restore  health in the  housing finance industry.