HVCC is Here to Stay

Technical Mortgage Info Warning: parts of this article are not intended to be comprehensible to the man on the street. I know some mortgage professionals that won’t understand them either, though, so don’t feel bad.

There is a lot of chatter on the ‘net about the Home Valuation Code of Conduct (HVCC), most of it centered around “repealing” it.  For the uninitiated, the HVCC is a 3-page set of rules governing compliant appraisals on all loans to be sold to FNMA/FHLMC (Fannie Mae and Freddie Mac), which is almost all non-FHA loans currently being written.

Up to May 1 of this year, appraisals were ordered by loan originating staff, either by loan officers or underwriters, directly from the appraisers or appraisal companies that would perform the work.  Those arrangements often became very close, with a loan officer directing most or even all of his appraisal ordering to a single appraiser.  This contact often resulted in close friendships between appraisers and loan originating staff.

Occasionally – nobody really knows how often – that relationship resulted in an appraiser fudging his numbers, giving a property a higher value than he would have if he had been working for a stranger.  Occasionally, a loan officer would direct an appraiser to hit a particular value in order to make the loan work.  Very occasionally – everyone admits that this didn’t happen very often – a loan officer would threaten an appraiser, telling him that unless he hit a particular value, he wouldn’t get paid at all.  This was illegal, but it still happened once in a while.

Look, nobody wanted to do an appraisal that would make the loan not work.  Nobody had any incentive for that.  It hurt the borrower, who couldn’t get his loan, it hurt the LO, who was on the hook for the appraisal and now wouldn’t get paid for all the work he had done, and it hurt the lender, who wouldn’t get to write the loan, and it hurt the appraiser, who not only risked not getting paid, but also might find that he didn’t get any work from that LO any more.  There was gigantic incentive for the appraiser to hit a target price for the house.

Enter Andrew Cuomo and the State of New York.  They determined that they could score big political points by suing someone in the mortgage industry, so they chose First American Corp and its subsidiary, AppraiseIt, which provided appraisals to, among others, the late Washington Mutual, for conspiring to inflate the value of appraisals.  The lawsuit widened as everyone sought to shift the blame, and eventually it encompassed the two largest mortgage holders in the US, Fannie and Freddie.

They settled.  The settlement was, in part, HVCC, wherein Fannie and Freddie agreed that every loan they purchased would have to be certified tamper-free, that is, that the origination staff had nothing to do with selecting the appraiser involved, nor had that origination staff communicated with that appraiser directly in any way.  There’s other stuff, but that’s the gist of it.

How do you order an appraisal without talking to an appraiser?  Well, you use (tadaaaa!) an appraisal management company (AMC), which becomes the middleman in the operation.  Obviously, these AMCs do this work out of the goodness of their hearts, without taking a fee.  What’s the phrase, here, ROFLMAO?

No, of course they charge money for doing the ordering of the appraisal and coordination of the process, which money comes from two places – one, they charge the LO an additional fee on top of the appraisal fee, and two, they (almost always) pay the appraiser less.   Adding this layer of bureaucracy slows down the loan process and increases its cost.  With me so far?  Looking for the good part?  Keep looking.

While building a firewall (Diana Olick’s phrase) between the appraisers and the loan officers sounds like a good idea, in practice, it doesn’t work very well.  True, it will make it more difficult for LOs and their staff to put pressure on an appraiser to reach a particular value, but nobody thinks that was routinely happening anyway, since it was already illegal.  It does NOT, however, remove the incentive for an appraiser to inflate the value, since all the parties that were harmed by a low appraisal before are still harmed by it now.  AMCs know which appraisers give low values, and they shuffle them off to the nether parts of the panel’s rotation, because they have to have happy LOs, or they don’t get any work.  The surest way to tick off the LO is still to provide a low appraisal.  So the conflict didn’t go away, it just got an intermediary.  This is almost never a solution to a problem.

Appraisers hate the HVCC because they’re getting chintzed on their fees, have to work with big, impersonal firms instead of the guys who do the actual ordering, and now have to negotiate getting approved by new groups of people that they don’t know in order to get the same work they used to get by being good at their jobs.  LOs hate the HVCC because it increases the time to get loans done, which costs them money, and because they now have to use faceless companies of orderers to get appraisals instead of the guys they know and trust.  Borrowers hate the HVCC because it slows down the mortgage process and costs them more money.  So like many judicial settlements, it creates a perfect storm of crap that hits everyone at once.

And we had better get used to it, because it is not going to go away.

There are so many problems with getting rid of this thing that I hardly know where to start, but here’s a stab at it.  First, it’s more regulation of the mortgage industry.  Since all the problems in the world, from foul air to decreased calcification of coral reefs along oceanic shelves, have been caused by mortgage people, the trend is decidedly in favor of more and more regulation of the loan process.  Having myself come from the securities industry, I can tell you that regulation NEVER goes back in the bottle.  No form is ever shortened, much less eliminated.  All regulation gets worse, all the time.

Second, we’re not dealing here with a regulation that can be adjusted, or a piece of legislation that can be repealed or struck down in the courts.  This was a settlement, imposed by a judge, agreed to by the parties involved.  How, exactly, does one go about getting rid of that?  You can’t re-open the case.  You can’t change the HVCC, being as it is part of the settlement, unless you can get both parties and the court to agree to the alteration.  Have you read the State of New York’s hymn of praise to itself over this deal?  Here it is. Go ahead, I’ll wait.  It’s pretty short.

I take from that statement by Mr. Cuomo that “repeal” of the HVCC is not really part of his agenda.  I take it, in fact, that he’d have to be dead before he would agree to such a thing.  Add that to the regulatory climate, the attention span of most people, who don’t know what the HVCC is and don’t see why they should learn, and the total inability of the mortgage industry to get together to lobby for anything, and I confidently predict we’re not going to see much change in this Code of Conduct.

There were hosannas shouted when the Federal Housing and Finance Administration (FHFA) issued a call for specific instances where the HVCC had caused problems, but I don’t see why, because what problems has it created that weren’t there before (in, admittedly, much reduced form)?  Your appraisals are slow to come back?  They cost more than they used to?  The valuations are lower than you think they should be?  Can you see any of this being at all persuasive to a federal agency?

I can’t.

So my advice to all the loan officers out there is to just shelve it and find an AMC that does a good job fast, with great customer service.  Someone like these guys, for instance.  If you’re an appraiser, I recommend finding an AMC that will pay you what you are used to getting paid.  Like these guys, for instance.

And get ready for the HVCC to be applied to FHA loans in the near future.  That is significantly more likely than that it will go away.

3 Responses to “HVCC is Here to Stay”

  • AJ The Appraiser says:

    One thing that is not mentioned above is that the HVCC had called for corporate independence. This makes sense because the way it was released, the rules allow for a bank to own the AMC it gets the orders from. This is a joke since the lawsuit was filed because an AMC (eAppraiseit) was in collusion with WAMU (a lender) to inflate values.

    If you want regulation that will work, let’s try putting someone besides the primary focus of the lawsuit in charge of the industry. First American was the reason for the lawsuit, and now they are the primary winners in the new system.

    If this makes you as upset as is makes me, try signing the petition at http://www.hvccpetition.com

    These rules are a blueprint for collusion!

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