The new “code of conduct” that was supposed to protect lenders and borrowers from faulty appraisals has caused higher costs, delays and considerable chaos in home sales and loan refinances.
Mortgage brokers, appraisers and real estate agents are up in arms over the new rules, which dictate how lenders select an appraiser when they originate certain home loans. Few borrowers care much, if at all, about how appraisers are hired or paid, but those borrowers whose loans have been delayed or derailed due to the new rules may take a very keen interest, indeed.
At the center of the controversy is the Home Valuation Code of Conduct, or HVCC, which outlines appraisal-related practices lenders must follow with respect to so-called conventional or conforming loans that they want to sell to Fannie Mae or Freddie Mac. The practices are intended to reduce the incidence of appraisal fraud and prevent inappropriate pressure being placed on appraisers to inflate home valuations. The code, which became effective May 1, does not apply to “FHA loans,” which are insured by the Federal Housing Administration, or “VA loans,” which are guaranteed by the U.S. Department of Veterans Affairs. (Fannie Mae and Freddie Mac have both posted FAQs about the code.)
New rules protect borrowers from inflated appraisals
David Feldman, president of First American eAppraiseIT, an appraisal software and management company in Irvine, Calif., says the code is “very good for borrowers” because the new practices will help to ensure that home valuations will be “less inappropriately influenced.”
“(Homebuyers) don’t want to pay too much, and they want to pay the right price,” he says. “For refinances, if you were hoping for a ‘higher value,’ prior to the code, if there was any pressure, you might have gotten it or not. Now that will be lessened, so it protects borrowers from themselves.”
That may prove beneficial, yet the code also has created other unintended consequences in these areas:
- Accuracy. The accuracy and credibility of an appraisal should be the borrowers’ chief concern. Appraisal management companies, or AMCs, which now perform more than half of the appraisals nationwide, contract with tens of thousands of appraisers but typically assign jobs only to several thousand, who complete their work “quickly and with good quality and good service,” Feldman says.
John Stafford, a loan officer with Reliant Mortgage in Dallas, takes exception to such claims. He says there are two types of appraisers: the “slap-dash” kind, who base their valuations on the first comparable sales they can find, and the more competent kind, who “work very hard to get the absolute best value, but fair value within the regulations as they are.”
Borrowers should be concerned, Stafford says, because “a lackadaisical effort on an appraisal can easily create a value that is 10 percent lower than it should be.” An artificially low value can kill a home purchase transaction if the appraisal doesn’t support the sales price or derail a loan refinance if the appraisal results in a higher loan-to-value ratio and, consequently, a less attractive interest rate.
- Timeliness. The timeliness of an appraisal is also a prime concern for borrowers because they typically need to meet the time frame of a purchase-contract contingency or interest rate lock.
Rob Carter, a Realtor with ZipRealty in Washington, D.C., believes the code has introduced much more uncertainty into the appraisal process.
“We are all used to knowing when the appraisal is going to get done and what the outcome is going to be,” he says. “It’s a little frustrating when you don’t know.”
Feldman disputes the notion that the code has caused delays.
“The turnaround has not been affected even a twitch,” he says.
- Cost. Borrowers are also naturally concerned about the cost of an appraisal. Stafford says appraisals have become more expensive as a result of the code because lenders had relied more heavily on automated valuation models, or AVMs, or so-called drive-by appraisals, which required only a confirmation that the home hadn’t vanished from the property. Now, he says, lenders are more inclined to require a full appraisal, which is more costly.
Moreover, borrowers may now be required to pay for an appraisal upfront, which means they’ll be paying out-of-pocket for that expense even if the loan doesn’t close. Borrowers also may have to pay for a second appraisal if the first proves problematic or they want to switch their application to a different lender. The code allows appraisals to be transferred, but lenders aren’t required to facilitate that and must make sure an incoming appraisal complies with the code.
A related issue is whether appraisers should be better compensated for their services. Feldman admits they’re paid significantly less for jobs they’re assigned through AMCs, but he believes their pay is a “cultural question” that shouldn’t concern borrowers.
“Should borrowers pay more so appraisers can make more and therefore be happier?” he asks. “Or is this a new model that appraisers make less per order, although they may become more efficient, so at the end, they may be OK?”
Cultural questions aside, there’s no debate that AMCs have gained market share as a result of the new rules. Some AMCs are independent; others are owned in whole or in part by lenders or title insurers. These companies schedule the jobs and keep as much as half of the fee for their services.
- Disclosure. Borrowers may like a new rule that requires the lender to supply a copy of the appraisal to the borrower three days before the loan closes. That right may be waived, though not at closing.
Lenders are careful to comply with this rule, Feldman says, because an inability to demonstrate that they did so will void their certification of the loan to Fannie Mae or Freddie Mac.
That may give comfort to the two mortgage companies, but the code offers no recourse to the borrower if the appraisal isn’t handed over on time and, thus, causes a delay in closing.
How to cope with new appraisal rules
Borrowers are well-advised to have a frank conversation with a loan officer, mortgage broker or Realtor before they apply for a loan since they no longer can rely on behind-the-scenes “value checks” to find out whether an appraisal is likely to return a high enough value for the proposed transaction.
Feldman advises borrowers to check into sales prices of comparable homes, online home valuations and news reports of home value trends before they apply for a loan, as difficult as that research may be for individuals not schooled in such matters.
“The hard part for homeowners (is) to be as realistic as they can, so they don’t waste their time and just get disappointed,” he says. “A good lender or mortgage broker will guide you.”
Carter advises homebuyers not to waive the appraisal contingency in a purchase contract because that may be their best protection against an inflated sales price, perhaps as a result of an overexuberant bidding war.
The code itself calls for an “Independent Valuation Protection Institute” to operate a compliance-and-complaints hot line and promote “best practices for independent valuation.” That may sound like a good idea; however, this institute has yet to be established.