Divorce Equity Buyouts - Which Appraisal Is Used For The Mortgage?

Understanding HVCC's Impact On The Appraisal Process

If Divorcing Parties order their own appraisal, why does a Mortgage Lender need to order a separate appraisal?  If there are multiple appraisals, which one is used for the Divorce Equity Buyout loan process?  The answers stem from unintended consequences of the federally mandated Home Valuation Code of Conduct (HVCC).

Prior to HVCC, there were several report incidents of alleged collusion between Lenders and Appraisers, to include:

• Positive Reinforcement – Example: “If you can ‘bring in’ the value of the property high enough for the deal to work, I (the Lender) will give you (the Appraiser)…” (this could have been the promise of more referrals, monetary incentives, etc.)
• Negative Reinforcement – Example: “If you do NOT ‘bring in’ the value of the property high enough for the deal to work, I (the Lender) will NOT give you (the Appraiser)…” (this could be the threat of no more future referrals, “blacklisting” the Appraiser, etc.)

In short, HVCC was created in 2008 amidst the Housing Crisis (aka Mortgage Meltdown) with the goal of eliminating collusion between Mortgage Originators (Lenders) and Licensed Residential Appraisers.  Essentially, HVCC put a chaperone called an Appraisal Management Company (AMC) between the Mortgage Lender and Appraiser to eliminate any contact between these parties. Now that HVCC is in place, the AMC handles communications between Lender & Appraiser.

With the above in mind, the standard method of ordering and obtaining Residential Appraisals is typically as follows:

1. Lender orders the appraisal report through the 3rd Party AMC
2. Borrower (typically) pays the AMC directly for the amount owed to complete the appraisal
1. As with all 3rd Party Non-Recurring Closing Costs, the Lender is NOT permitted to “mark-up” the cost of the appraisal
2. NOTE: appraisal fees vary by county, size/value of property, and/or other characteristics
3. Upon receipt of Borrower payment, AMC assigns the Appraiser via the “next up” approach based on an Approved Appraiser List for a given geographical location near the Subject Property
4. Upon receipt of the order from the AMC, the Appraiser reaches out to the point-of-contact necessary to gain access to the Subject Property (the Appraiser must have access to the interior of the property to perform the appraisal)
1. For “Purchase” Loans, the typical point-of-contact is the Listing Agent (although the Buyer’s Agent may request to be the point-of-contact “in addition to” or “in lieu of” the Listing Agent)
2. For “Refinance” Loans, the Homeowner is typically the point of contact
5. Upon completion of the report, the Appraiser sends the appraisal to the AMC for an audit
6. Upon completion of the audit, the AMC send the finished appraisal report to the Lender
1. It is typically at that point where the Lender discovers who the actual Appraiser was on this report
2. By only discovering the identity of the Appraiser this late in the process, the Lender has no influence on the Appraiser to determine value (as value as already been determined)
7. Lender sends a copy of the appraisal directly to the:
1. Buyer & Buyer’s Agent (Purchase Loans)
2. Homeowner (Refinance Loans)

How Does HVCC Impact Appraisals Intended for Divorce Equity Buyouts?

Oftentimes, as part of the process of equalizing the assets, the Divorcing Parties will hire an Independent (non-Lender involved) Appraiser to render a valuation of Subject Property.  While the value estimate of the Independent Appraiser might be used between the Divorcing Parties and/or their Attorneys for negotiation purposes, the Mortgage Lender will ultimately need to obtain their own appraisal (due to HVCC).

Potential issues that may arise amidst "multiple appraisals" include (but are not limited to): paying additional fees for what appears to be the "same process" along with the high probability that the 2 appraisals will come in at different values (which almost assures that one party will be happy with the Mortgage Lender's appraisal, while the other party might feel compelled to cry foul).

As a Certified Divorce Lending Professional (CDLP), I am constantly involved in these dynamics and completely respect the appraisal neutrality concerns which may be present by the non-borrowing spouse and/or their attorney. My hope in creating this article is to provide clarity on HVCC's impact of Divorce Equity Buyout appraisals to help insure all parties that complete neutrality is administered when ordering the Mortgage Appraisal whether or not a divorce is involved.