HVCC is here to stay.

I’ve written before, several times now, on the Home Valuation Code of Conduct (HVCC), which has been widely blamed for depressing home values and causing borrower and buyer and seller and Realtor and mortgage professional frustration since it went into force on May 1 of this year.  There has been what appears to be a huge outcry over the Code; there’s a petition to get rid of it that has over 75,000 signatures, and there’s a bill in Congress to institute an 18-month moratorium.

None of this makes any difference.  Want me to outline the reasons?

1. 75,000 people sounds like a lot, until you realize that it isn’t enough people to fill up the Big House at the University of Michigan on Saturday.  Spread that over the entire country, and it’s 1500 people per state.  That’s an irrelevancy.

2. HR 3044 was introduced by two of the most obscure memners of Congress.  This is never a positive.  It now has 91 cosponsors, which sounds like a lot, until you realize that cosponsors don’t mean very much.  Congressmen cosponsor most anything that gets introduced, if they think it will give them cover.  HR 3044 is perfect for this, because it makes it look like Congress is doing something when, in fact, it isn’t.  The bill is stalled in the House Finance Committee – hasn’t even been assigned a subcommittee yet – and isn’t going anywhere.  Paul Kanjorski (D-PA), who is on the Finance Committee, has his own bill that has passed the House twice already, and that’s the one the Committee is backing.  Read it.  It doesn’t do anything at all with HVCC.

3. When the momentum is this heavily toward increased regulation, there is no practical chance that any restrictions on the mortgage industry will be lifted.  Since we all talk to each other all the time, we get this sense that the whole country is opposed to the HVCC and that the momentum is to get rid of it.  Then FHA institutes its own HVCC-like language, and you realize that you’re getting a false picture of how things really are.  Washington is spending thousands of man-hours a week finding NEW regulations to place on us, and you think any effort will be wasted on removing some?  That’s delusional.  If there really were any pressure to pass the moratorium, or to get rid of HVCC altogether, what do you think the chances are that the bureaucrats at FHA would be patterning their own parameters after it?

4. Not even everyone in our industry is opposed to the HVCC.  I’m not, for instance.  I like most of it.  There are parts that I think need tinkering with – I’ll talk more about that later – but on the whole, I think it addresses a serious problem.  I’m far from alone.  Yesterday there was an excellent article by the inimitable Marcie Geffner about how repealing the HVCC would be a step backward, and this was echoed in the comments, especially notably by two long-time professional appraisers that like the HVCC and what it’s done for them.  I have letters from appraisers that praise the AMC I use – these are quite important to me – because their lives have been made easier since the HVCC went into force.  Saying that you like the HVCC is about on par with saying George Bush was a decent President, so most people, even if they think that, keep their mouths shut.  This doesn’t mean there aren’t any people that do.

When I started writing about this back in the early summer I predicted not only that there would be no repeal, but that the FHA would institute its own version of HVCC before long.  Last Friday, FHA released new appraisal restrictions that are almost word-for-word out of the HVCC, exactly as forecast.  I confess that I cheated when I made the prediction; I had actually spoken to people in Washington DC that knew what was going on (I know, I know, bloggers are supposed to make wild, unsubstantiated guesses about things, not do actual research).  Since then, I’ve done more discussing, and I have an idea what the next HVCC-related event is going to be.

It’s okay, you’ll like this one.

It concerns appraisal portability and the use of AMCs.  Before too long – I’m forecasting by early next year – there will be a national registry of AMCs.  At that point, Fannie/Freddie will institute a regulation that a lender must accept an appraisal performed by any registered AMC, which mirrors the way things used to be, where as long as an appraiser was licensed under the state laws where the loan was to be done, the lender could accept the appraisal.  Seems a small change.  But it isn’t.

The biggest problems mortgage and appraisal people have with the HVCC are caused by bad AMCs shorting appraisal fees and causing crappy appraisals to be generated.  Good AMCs – and there are some, I use one – don’t do this.  The good AMCs would, in a free market, kill off the bad ones.  Appraisers would insist on full fees, and only the good AMCs are paying them, so appraisers would only work for the good ones and the bad ones would die.  Most of the problems with HVCC would go away.  Once this regulation appears, we’ll have a much free-er market in appraisals than we do now, and a great deal of normalcy will return to the market.

For those of you that have spent a great deal of time and energy protesting and rallying the troops to get rid of the HVCC, I strongly recommend that you use your time to do something else.  Lobby for a free market in AMCs instead.  For you appraisers, help is on the way.  Call the Appraisal Institute and tell them to lobby for an AMC registry, so we can get back to being able to sell appraisals to anyone, instead of a restricted few.

It’s going to get better.  Eventually, it’s going to get better.  I promise.

On May 1, 2009, Fannie Mae and Freddie Mac agreed to abide by the Home Valuation Code of Conduct (HVCC), which regulated how appraisals could be ordered and performed.  Without going into a detailed analysis of the HVCC and how it spawned (that’s here, if you really want it), let’s just say that the results have been fairly negative for the ground troops in the mortgage/real-estate market.  This is hardly surprising, as there has never been a government regulation that I can think of that has made things better, but still.  Annoying.  Worse than annoying.

Appraisers have hated it, because it’s nearly universal that they are being asked to do more work for less money now.  Realtors hate it, because their purchases don’t fly when appraisals come in lower than the sale price.  Mortgage guys hate that, and also hate that low appraisals kill their refinance deals.  Borrowers hate it because their loans cost more and take longer.  So the experiment has not been a resounding success, has it?

The reaction, being as negative as it is, has caused Congress to act, putting a bill together to impose an 18-month moratorium on HVCC.  Unfortunately for the howling pack, this bill was sponsored by two of the most anonymous members of Congress, and has garnered only 19 co-sponsors (remember, there are 435 Congresspeople).  It is not being supported by the Appraisal Institute.  It has small to zero chance of passage.  The Federal Housing Finance Administration (FHFA) says everything is hunky-dory (no, really, see here).  And I have information out of Washington that the FHA is considering imposing its own version of HVCC, which would effectively make HVCC the national appraisal code for all mortgages.  Depressed yet?

Don’t be.  The HVCC may not be going anywhere, but the good news is that the HVCC is not the problem, at least, it isn’t the problem all by itself.  There are two things that are worse than the HVCC, one of which will fix itself, one of which has to be fixed in the HVCC, neither of which requires an act of Congress.

The first problem is that the market stinks.  Look, there is a huge overabundance of housing stock.  If no houses were built and no more went up for sale than what we have now, it would take nearly a year for us to sell all the ones that are on the market now.  Think that depresses prices?  Estimates are that up to HALF of the mortgages in the US are at risk of default.  Foreclosures are breaking records – one out of 84 houses in the US received a foreclosure notice in the first half of 2009.  More are on the way.  That’s causing huge pressure on the market, and not in a good direction.  When house prices fall like this, it blows up a lot of deals.  A good appraisal just tells you where things are, it doesn’t guarantee you’re going to like the feng shui.  This is NOT the fault of the HVCC.  And there’s nothing you can do about it.  But it will, eventually, go away as the market stabilizes.

The second problem, bad appraisals, long lead time, appraisers being shorted money, all these problems are also being blamed on HVCC.  But these are also not the fault of the HVCC, at least not directly.  How do I know this?  I know it because although like everyone else I am subject to HVCC regulation, I don’t have any of these problems.

It’s a miracle!  It’s like winning the lottery!  Nah.  It’s like any other part of this business.  My title companies do remote closes, even closes more than an hour’s drive away, for no extra charge.  Why?  Because they want my business, and that’s what it takes to get it.  Similarly, my appraisal management company (AMC) gets my orders done fast, and well, and pays their appraisers full fees, because that’s what it takes to get my business.  See, with title companies, I have a choice, so I get what I want.  The same is true with my AMC.

But here’s where the HVCC is screwing things up.  To show you how, let’s go back six months.  Were you happy with your appraiser six months ago?  Why is that?  Probably because he was honest, fast, and knowledgeable.  Did he like you?  Very probably.  Why?  Because you didn’t hassle him and he got paid on time.  The two of you were able to come to this amicable arrangement because each of you were free to choose to go somewhere else if you weren’t happy.  It was, in fact, a violation of the law for a lender to dictate the use of a particular appraiser on a transaction.  Choice and competition always lead to efficiency and improved performance.

Fast forward to the present, and what do you have?  Well, it depends.  If you’re a lender, you probably have an AMC that is a subsidiary of your company, and which you have to use.  If you’re a broker, each of your lenders has an AMC that it requires you use.  These AMCs are contractually bound to the lenders they serve, and their bread is buttered by the lender.  They do what the lender wants.  You, as a loan officer, have no choice but to use them.  If they stink – and ladies and gentlemen, the stench is overwhelming much of the time – it doesn’t matter.  They don’t care and they don’t have to, because you have no choice.  You have to use them.

It’s even worse for the appraisers, who get offered a pittance – 40% less than normal – for the same work.  If they don’t take it, they don’t get more work.  They have no choice, either.  What this means is that the good appraisers just quit.  They’re worth more than they’re being offered, and they know it.  To be true to their standards, they refuse the work.  So new and/or desperate appraisers take the jobs, and they take as many as they can, because they have to do more to make the same money.  Besides, the lender benefits directly when an appraisal is low – it reduces their risk.  Voila!  Lower appraisals, lower quality, longer lead times.  Sound familiar?

One group proves that this isn’t how things have to be – correspondent lenders.  Free to use whichever AMC does the best job, correspondents (my brokerage is one) are free to select AMCs that meet the best standards and do the best work.  Magically, most of the HVCC problems evaporate.  I can testify to this first hand.  In fact, I use my AMC even for FHA loans, even though I don’t have to, because they make my life better.

So while I believe that HVCC is here to stay, and I think that all attempts to get it overturned are doomed to failure, there is a change to the status quo I think is not only necessary but relatively simple to get implemented.  What is needed is a return to the situation that existed before the HVCC went into force, when it was black-letter illegal for a lender to require the use of a specific appraiser.  No lender can demand a specific title company, so why a specific AMC?  Is that not an obvious conflict of interest?  ESPECIALLY when the AMC is owned by the lender itself?!?

All it takes is a regulation that no lender can mandate the use of a specific AMC.  Instantly, we have competition and choice.  My AMC, 1st Choice AMS, which plays fair and does mind-blowing customer service, can take on the First Americans of the world and beat them.  You, loan officer, your problems go away (except for the market, sorry, can’t fix everything).  You, appraiser, can get paid to be good again.  The AMC streamlines the process for everyone.  And presto, the HVCC stops being an obstacle to good business.

The small change proposed above can be handled by administrative rule, not congressional action, can be implemented in a weekend, preserves the integrity of the appraisal process and solves the market problems the current system exacerbates.  Instead of this pointless tilting at windmills in Congress, why not get behind a proposal that has a chance to work, and fixes not only our problems but the industry’s as well?

Not to be.

Tomorrow, one of the biggest regulatory changes in the mortgage industry goes into effect. It will alter the process, increase costs and processing times, and add a layer of bureaucracy to all but a handful of mortgage applications, affecting almost every borrower in the US.

And you have never heard of it.

It’s called the Home Valuation Code of Conduct (HVCC). It’s the result of a lawsuit initiated by the State of New York, which was settled last year by Fannie/Freddie. The settlement establishes the HVCC, and it has a number of provisions that are significant, expensive, and almost invisible to the general public.

First, and probably most significantly, the days of getting an appraisal yourself, or of having your loan officer arrange one, are over. Any contact whatever between your loan officer, his processor, or any member of the originating staff, and the appraiser, invalidates the appraisal. You, the borrower, can no longer pay for your appraisal at the door, as has been done for centuries. All appraisals have to be arranged through an appraisal management company (AMC) like this one. They take the order from the LO, transmit it to the appraiser, collect it when completed, and send it to the underwriter. At some companies, the LO never sees the appraisal at all. No kidding.

Second, the appraisers have to deal with AMCs now, and not with LOs. This is supposed to provide a level of insulation, so that the LOs can’t put undue pressure on appraisers to raise the value of their appraisals. Sounds great, right? Well, as with so many government “fixes”, this one causes more problems than it solves. True, as an LO, I can’t influence my appraiser to artificially raise the value of the appraisal. Neither, however, can I ask for additional comparables when I know that they exist. I can’t go out, search for non-disclosed sales (Utah, and many other states, do not require home sales to be reported to any central database), and get documentation so that those sales can be used for comparison purposes. I can’t even call the appraiser to get “E” changed to “East” so that the appraisal and the title report match. Nope. I have to call the AMC for that. Then they have to call the appraiser.

Naturally, this takes longer, too. I don’t even have to mention this, do I? A whole new company has to handle the request in between the initial order and the acceptance. Every piece of communication, no matter how small, has to be funneled through the AMC. The guys I use are fast. But no company can possibly be as fast as a direct phone call.

And of course, the AMC doesn’t do any of this for free. They charge. Frequently, with very few exceptions, they charge the LO (which means the borrower gets charged most of the time) AND they charge the appraiser. If an appraiser was used to getting $350 for an appraisal, AMCs are routinely offering $300 or less, while charging the LO/borrower $450 or more, and keeping the spread. It’s quite a thing to see.

Finally, the HVCC is, well, impotent. It creates more paperwork, which we’ve addressed, and it creates higher loan fees, which we talked about as well, but the kicker is that it does all this without impacting real mortgage fraud in any significant way. Sure, there are LOs that used to really put strong pressure on their appraisers to edge up, but now will not be able to do that. There are a few of those, which I freely admit. But the real fraud, the fraud committed by appraisers and LOs in concert, either by inventing fake comps or by appraising mythical houses, etc., that sort of fraud won’t blink at having to pass through an intermediary. These guys already involved title companies and large numbers of third-party helpers; what’s one more? It isn’t as if those kinds of safeguards aren’t easily circumvented. There’s an AMC next door. Do you think I don’t know the guys that run it? Do you seriously think I couldn’t bribe them to cheat for me, if that’s the sort of fellow I was? When I stand to make tens of thousands of dollars by doing so?

So here we are again, with the mortgage industry reeling, costs spiraling upward and home values declining, and credit restrictions getting so tight that the Apostle Paul would be denied a loan, and the regulators’ response to this is…add some more costs, more bureaucrats, and more time. Well, okay then! That will fix it!

One of the problems we have in the mortgage industry, and everywhere else that I can see, is that we think that we can make dishonest people straighten up and fly right if we just throw enough regulations at them. This is ridiculous. IT NEVER WORKS. All it does is cost the honest people money and time, while increasing the inconvenience of cheating a very, very little.

Born of decent intentions, the HVCC is just one more thing to add to the pile.