I don’t vent.  I don’t blow up.  I think that kind of negative emotion is counterproductive and I fight it.  Still, I’m mortal.  Sue me.

The enemy of growth is uncertainty.

I am a gardener some of the year, in my spare time, and I have about a hundred houseplants, and I’ve learned a few things from this activity that bear directly on the current economy.

Plants grow well in certain conditions. They like there to be a certain amount of light, a certain amount of heat, and a certain amount of water. Not an average over a week, mind you, but a definite amount every day. No water for six days, then 3 gallons all at once will kill most plants. Light uninterrupted for four days, then three days of darkness is not really conducive to good growth. An average temperature of 65 is great, as long at it doesn’t consist of half the time at 30 and the other half at 100. Plants like it predictable. A little water today, a little more tomorrow. 14 hours of light today, 14 hours tomorrow. Temperatures in the 60-70 range all the time.

Oh, they’ll still grow if things are a little sketchy. They can take a few days of rain, then a few days of bright sunshine and heat. If the soil’s not right, or the water is the wrong ph, or there are rocks to negotiate, they can handle that, but they won’t grow as well as they might otherwise have, and if two or three of those things combine, the failure rate goes up pretty fast. Bugs, incidentally, love to attack weak plants. They tend to leave stronger ones alone. What that means is that once you start down the path to weakening your plants, you can expect other things to start going wrong and make things worse.

Let’s apply this to the current economy, shall we?

Corporations like things predictable. If they know what tax policy is going to be, they can concentrate reserves and personnel on development and growth. If tax policy is changing every ten minutes, a lot of those resources are channeled into figuring out whether today’s successful business model is going to be illegal in a year, or perhaps next week. It’s distracting and it’s destructive.

In the mortgage industry, which is my industry, we’ve spent the last year trying to figure out what all the new rules and regulations mean for us, how much extra time we will have to devote to managing the increased paperwork, and whether whole lines of business are even viable. Some of us – the best of us – will survive this, too, as we’ve survived everything else so far. But NONE of us will do better work for the client or ourselves than we would have if we’d been left alone. ALL of us, and this goes for the Top 100 all the way down to the green kid that just got his license, are spending huge amounts of time learning to navigate government regulations instead of trying to do a good job for the borrower.

The argument is fairly made that if we had spent our time doing a good job for the consumer in the first place, we wouldn’t have all this government regulation, so it’s our own fault. But this argument is stupid.

First off, it’s not the broker on the street that created the 100% no-down 520 FICO no-doc loan. All the brokers did was sell the product. Was it a mistake to sell it? I guess. But you know the part of page 3 of the 1003 that asks all the invasive questions about race and sex and national origin? That’s not there because brokers needed more boxes to check. It’s there because the government will sue you and put you in jail if you don’t make loans to people, especially low-income people and MOST especially people that routinely fall into the category of higher-risk borrower. A broker could decide not to sell any of those products at all, but this is sort of like deciding not to sell iPhones because you think that it’s a fad and people will eventually figure out that you can’t replace the battery. It’s stupid to do this. Businesses exist to make money, and failing to sell what people are buying, just because you don’t like it yourself, is a great way to end up working at WalMart. No offense, Mr. Walton. This is even more especially true when the Department of Housing and Urban Development can put you in federal prison for not doing so.

Second, the vast majority of the problem in the real-estate industry has been caused not by bad loans, but by bad houses. Not that they’re poorly constructed, but that they were overpriced. Some of that is the fault of the lending institutions, which created loans that roughly doubled the available pool of buyers, naturally (and somewhat artificially) boosting home values. At least as much of it is the fault of the government, pushing said lenders to create loans for people that traditionally default in huge numbers. And a lot of the fault has to be carried by the Fed, leaving interest rates at ridiculously low levels for a long time, again reducing the cost of buying and ramping up demand. None of that stuff has anything to do with the loan officer on the street.

And lastly, there’s the elephant in the room, which is that none of the government regulations will do one blessed thing to make any of the above less likely in the future. None. Not HVCC, a lawsuit about a lender-owned AMC that specifically permits lender owned AMCs to continue. Not HERA, a gigantic waste of time and money that pushed closings back a week or more on most loans. Not RESPA, The Sequel, which hilariously creates a new, “simpler”, 3-page Good Faith Estimate that is so iron-bound that no lender with any reputation will issue one until the borrower signs a notarized contract to do business with that lender and nobody else. Not one of these byzantine regulations – oh, and let’s include the national database of loan originators, which now requires a fingerprint card, as if there were any evidence whatever that such provisions have reduced any kind of fraud in any industry – will do anything whatever to reduce the incidence of evil people duping stupid ones.

But it will make it so that the good loan officers are unable to distinguish themselves from the rest of the herd. It will make it more expensive, more complicated, and more difficult to continue to work in this industry, which will chop down the number of players and – consult any economics textbook – raise the prices for the borrowers.

Our plant will continue to grow. We will make it through the drought, through the hail, and force our roots through the rocky ground. We will survive. But we will never produce the fruit that we could have, and no one else will, either. And tens of thousands of our compatriots will be out there competing for the six available jobs, having been killed off not by incompetence or laziness, but by the twin terrors of the Great Recession and Uncle Sam.  Worst of all, we can’t even plan for what we’re going to do next year, because we never know from one minute to the next what new dragon will rear its head.  Not a market dragon, hard as those are to deal with, but the mighty dragon of government, trying to “help”, and changing the temperature and the landscape because it makes re-election a better bet.

Happy New Year.

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?

The Home Valuation Code of Conduct (HVCC) is causing a firestorm of controversy and a growing wave of disgust across all parts of the mortgage industry.  I’ve already said before that I think it’s not going anywhere, and why, so I won’t rehash that, but as I was thinking about it the other day, I realized why I wasn’t as upset about the HVCC as others are.  And I realized that I had a solution to the frustration out there.

There’s nothing seriously wrong with the HVCC.  There is, however, something seriously wrong with the appraisal management companies (AMCs) that administer it.  The problem is this: almost all of them suck.

What used to happen, in brief, was that the loan officer would order the appraisal directly from the appraiser, who passed the completed appraisal back to the LO, and ordinarily this resulted in fairly quick service, or the LO would simply use a different appraiser next time.  Now, though, the LO has to order the appraisal from an AMC, which then orders the appraisal from the appraiser.  When completed, the appraiser transfers it to the AMC, which sends it to the LO.  Sounds simple, though not as simple as it used to be.

There are 3 problems with this:

1. The AMC takes a large cut of the appraisal fee for doing piddly.

2. The AMC slows down the process because it’s incompetent.

3. The AMC, as an intermediary, reduces the feedback between the business end of the loan (the LO) and the appraiser, which results in slower service and worse appraisals.

Let’s look at each of these three more closely.

1. The AMC takes a large cut of the appraisal fee for doing piddly. Well, yes, but not always.  Where there is competition in the marketplace, where LOs are free to select any AMC they like, this happens less often.  Where the problem comes in is where the AMC is the subsidiary of the lender, so that the LO has no choice but to use the AMC the lender dictates.  This used to be illegal.  No lender could dictate to an LO a particular appraiser he had to use.  But now, effectively, they can do this.  The AMC has a sweetheart deal with the lender, and screws exorbitant fees out of the borrower, while paying the appraiser less than standard wage.

It doesn’t have to be this way.  Appraisers can and should fight back by refusing to perform appraisals for AMCs that pay less than full fees.  LOs should ask for a fee sheet from the AMC, and the AMCs should be required to provide one.  If the AMC fee adds more than $100 to the cost of the appraisal, the LO should choose a different AMC, if at all possible.

Personally, I refuse to do business with an AMC that shorts appraisers money.  I went to my broker (at City 1st we have the advantage of being correspondent) and fought for the right to use an AMC that made my appraisers happy by paying them what they were worth.  LOs have much much more power with their brokers than with the State of New York.  Time to use some of that power on behalf of the many great appraisers that are being hurt by the HVCC – hurt because we haven’t cared enough to protect them.

2. The AMC slows down the process because it’s incompetent. AMCs are made up of people.  Generally, these aren’t the world’s most competent people.  Their customer service sucks, they’re slow, they charge too much, they’re unresponsive, or they burst into tears when they get criticized (this is not a made-up deal, ask @mortgagereports).  In short, they’re small, understaffed businesses.  But be fair.  Are these guys worse than your local contractor?  Your DMV?  Are they a lot worse than most appraisers?  No.  They aren’t.  But this is no compliment – the aforementioned “service” personnel are among the most proverbially terrible for customer relations.

The fix for this in the contracting world is that there are hundreds of contractors, and the good ones do well, and the idiots die off as word gets around.  Good plumbers and good mechanics and good appraisers float to the top.  You can find them, because the market makes it possible to find them.  What would happen if a contractor had a monopoly, got to build all the houses in a particular zip code?  That’s the DMV, and that’s what happens when you don’t allow competition.  But that, again, is what the HVCC allows that it should not – AMCs to be owned by, and exclusively provide appraisals for, particular lenders.  The good AMCs – and they are out there, I use one myself – are actually faster than my old process.  They’re easier to use, and I get better service than I ever did.  But I shopped.  I was lucky – I could.  If you can, you should, too, and let the incompetent companies die.

3. The AMC, as an intermediary, reduces the feedback between the business end of the loan (the LO) and the appraiser, which results in slower service and worse appraisals. Tough to argue this one.  Intermediaries are rarely a good solution to any problem – except where getting the relevant parties together directly (in this case the LO and the appraiser) could result in conflict or undue influence.  And that, ladies and gentlemen, is what the HVCC was supposed to prevent.  AMCs are supposed to solve this problem, but most of them simply create a new and larger one.

Does it have to be this way?  Absolutely not.  A good AMC could function better than a large appraisal company, taking orders in and efficiently passing them to the appraisers, while helping maintain a degree of autonomy for the appraisers.  The appraisers should be happy that they are not getting heat about their values, and that they no longer have to perform collections.  LOs should be happy that they don’t have to worry about overloading their appraisers in heavy times, causing slowdowns in performance, and they should be thrilled to be relieved of the task of selecting and vetting new appraisers all the time.  HVCC ought to make everyone better off.

But it doesn’t.  And it doesn’t, again, not because of what the HVCC contains, but what it doesn’t contain.  It doesn’t contain the one sentence that would make all of the above go away:

“No lender may mandate the use of any specific AMC for the performance of appraisal services.”

That’s it.  Instantaneously, AMCs like the one I use would get huge influxes of business, because they’re excellent at their job, they treat appraisers like professionals, and their customer service is outstanding.  The bad AMCs, and those are everywhere, would dry up and blow away, or they’d improve in a hurry.  Just like everywhere else in the economy.  Just like LOs, like lenders, like appraisers.

All of this frustration, all this lost business, all the howling and letter-writing and distractions from us simply doing our jobs, all of it, would go away.  We don’t need to force the State of New York and the FHFA, two gigantic bureaucracies, to completely toss out the results of two years of lawsuit.  All we need is one sentence.

Probably, it’s too much to ask.  But I’m asking, all the same.

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.

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.