Tuesday, June 23
Written 1:45 p.m.
APPRAISAL FRUSTRATION: Here's the blog post that will bring in the "me too" e-mails. The Home Valuation Code of Conduct, or HVCC, is driving property appraisers, mortgage brokers, Realtors, and buyers and sellers stark raving mad.
If you're buying or selling a home, or maybe even if you're refinancing, you've probably run into a complication arising from the HVCC -- most likely either a delay or an appraisal that doesn't seem accurate.
The code of conduct is the result of a legal settlement with the attorney general of New York. It is applied nationwide. And it should be considered a case study in the value of the legislative process: If the HVCC had been a bill introduced into Congress, it would have never passed without having undergone drastic changes. But it wasn't a bill and it isn't a law; it's a legal settlement by one state's attorney general, imposed on all 50 states.
Every public policy has unintended consequences. But that doesn't mean that the consequences are unforeseen. Plenty of people foresaw the unintended consequences arising from the HVCC. Because it didn't go through a legislative committee system, because it wasn't passed by two houses, and because it wasn't signed by a governor or president, those foreseeable but unintended consequences could be -- and were -- ignored.
Remember this the next time someone complains about how dumb and craven politicians are. It's easy for one person (in this case, an attorney general) to impose a deeply flawed policy; it's harder to get hundreds of legislators to agree on a deeply flawed policy. The legislative process is inefficient because inefficiency kills bad ideas. The authors of the Federalist Papers considered this a feature, not a bug.
OK, off that soapbox and onto another one. The HVCC was written to address a serious problem: Loan originators favored "Skippy."
Who's Skippy? He's the property appraiser who will say what the buyer and seller and Realtor and loan originator want him to say.
Some buyers don't mind overpaying for a house, because they're committing fraud, or it's the house they grew up in, or they're clueless, or they've been outbid on the last five houses they've made offers for and they're not going to let this one get away, or there's a seller-funded down payment, or for other reasons. The seller, real estate agent and mortgage broker benefit financially when a buyer pays more than the home's fair market value. So it's in their interest to hire Skippy, who will appraise the house at a value that will justify the loan.
New York's attorney general, Andrew Cuomo, recognized that these flaws contributed to the mortgage meltdown. In November 2007, his office sued an appraisal management company called eAppraiseIT, a unit of First American. He accused eAppraiseIT of colluding with Washington Mutual to use a list of "proven appraisers" who would provide the desired home valuations. Basically, he implied that these "proven appaisers" were willing Skippys.
"By allowing Washington Mutual to hand-pick appraisers who inflated values, First American helped set the current mortgage crisis in motion," Cuomo said in a news conference announcing the lawsuit.
That lawsuit was settled when the parties, as well as Fannie Mae and Freddie Mac, agreed to the Home Valuation Code of Conduct. Among other things, the HVCC forbids mortgage brokers from directly hiring -- or communicating wth -- appraisers.
Sounds like a good idea. But now we have a system in which almost all appraisers are hired through appraisal management companies that assign appraisers at random. Appraisers end up valuing houses in unfamiliar neighborhoods.
To understand why this is a bad thing, imagine that you're trying to buy or sell a house in one city, and you get an appraiser who doesn't know your city well, but is intimately familiar with another city 40 miles away. For example, let's say you're selling a house in Fort Worth and the appraiser is from Dallas. Or you're buying a house in San Jose and the appraiser is from San Francisco. Or you're refinancing a house in Ann Arbor and the appraiser is from Detroit.
In the lingo of the industry, an appraiser who isn't familiar with a neighborhood lacks "geographic competence." Critics of the HVCC say that a lot of appraisers are hired to do work outside of their area of geographic competence.
Marc Savitt, president of the National Association of Mortgage Brokers, said Saturday (at a panel discussion that I moderated) that the HVCC results in long delays that cost consumers more money because "consumers are forced to pay higher fees for extended lock-in periods, and the appraisals themselves are substantially higher."
Savitt, who owns a mortgage brokerage in Martinsburg, W.Va., added: "Appraisals used to cost between $350 and $400 in my area -- $350 was the average -- now we're seeing anywhere from $500 to $750.
"This thing, in plain English, is a train wreck. It's going to cause a second collapse in this housing industry and it's only six or seven weeks old."
Pat Turner, owner of P.E. Turner & Co. Ltd., an appraisal firm in Richmond, Va., said during another panel discussion, the next day, that the HVCC has weakened independent appraisers and strengthened appraisal management companies (such as eAppraiseIT). He said the appraisal management companies are charging higher fees now that the HVCC is in effect, for two reasons:
First, the HVCC makes it hard to hire an appraiser directly, so it hands market power to appraisal management companies, which can charge what they want. Second, big banks own minority stakes in appraisal management companies, so when consumers are charged higher appraisal fees, banks' bottom lines are fattened.
Turner and other appraisers complain that the appraisal management companies are cutting the fees that they pay to the appraisers for their work. Turner says one management firm blacklisted him because he refused to take a pay cut.
So the HVCC has resulted in delays, higher fees paid by consumers, and inaccurate valuations from appraisers who lack geographic competence. Other than that, it's a smashing success.