Hey America, Take Another One For The Team: HVCC Fallout Begins

This is a guest post by Hudson Valley real estate broker Joshua Ferris.

Sometimes real estate feels a lot like an episode of Desperate Housewives with all the drama culminating into a series of plot twists that completely change the story as you know it. First we started with HUD trying to protect consumers from unfair incentives tied to a builder’s financial affiliates. We all saw how well that worked out. Then we saw the continued rise of foreclosures in 2009 and now we have the newly implemented bank darling called HVCC taking hold.

What is HVCC?

HVCC stands for Home Valuation Code of Conduct and is the result of New York State Attorney General Andrew Cuomo’s 2007 lawsuit against Washington Mutual’s preferred AMC (Appraisal Management Company) eAppraiseIt LLC. The lawsuit came to be after eAppraiseIt was allegedly forced into providing excessive/unrealistic appraisals of properties to get the WaMu loans closed and, by way of getting the job done, getting signficantly more business from WaMu. Interestingly enough, NYS AG Andrew Cuomo had this to say in a press release:

“The independence of the appraiser is essential to maintaining the integrity of the mortgage industry,” Cuomo said.

Remember that quote because it plays a role in what you’re about to read next.

So in comes HVCC, which prevents mortgage brokers and others who are paid a commission contingent upon the loan closing from contacting/choosing appraisers. This is done to remedy the possibility of appraisers being strong armed into providing inflated appraisals. In return for the inflated appraisals the appraiser would get more business from those loan officers/brokers.

Reality Check!

Sounds good, right? It did in theory anyway. The problem is that HVCC basically kills any opportunities independent appraisers had to grow their business due to the legal liabilities it creates for the lender to use them. Instead, lenders are now using AMCs (Appraisal Management Companies) who assign appraisers on a round robin basis regardless of local market or work experience. Better yet, under the wings of an AMC an appraiser will now only receive up to 60% of the total cost of the appraisal whereas in the past an independent appraiser would receive up to 100% of the appraisal cost. How motivated would you be if your boss just told you that you now have to do the same amount of work but at a 40% pay cut? Appraisals are likely to skyrocket in cost.

What does it all mean?

As a real estate agent or a consumer it means:

• If you need to close on a home right away (i.e. to be moved in before the beginning of the school year) then you may now have to wait an additional 3-4 weeks for an appraisal to be conducted on the home you’re purchasing. You could have everything else totally finished and ready to go (I have on a number of client sales) and still be waiting weeks for an appraisal to happen.
• In the event that you locked in at a really good rate (say 4.75% on a 30-year fixed rate mortgage at the end of April) and the rate lock (60 day lock) expires before an appraisal takes place the buyer is responsible for extending the rate lock or accepting the latest rates available. If an appraisal was delayed by 3-4 weeks and you couldn’t close until the beginning of June your buyer could end up with a rate of, say, 5.70% resulting in a mortgage payment that will now be $117.51/month more on a $200,000 30-year fixed rate loan (doesn’t include taxes etc.) Doesn’t seem like much until you calculate it over 30 years which winds up being $42,303.60 more over the life of the loan.
• There is no guarantee that your appraiser will be familiar with the local market or specific neighborhoods because they are assigned at random. This could result in an unreasonably low appraisal or one marred with bad comparable properties that artificially lower the value of the home. Want a new appraisal? You’ve gotta pay for it!
• If your mortgage broker wants to move your loan to a different lender and you have already paid for an appraisal with the previous lender it is now in the hands of the previous lender to release that appraisal to you. Want it right away? Ehhh… you might be better off ordering another one (at your own expense of course!)

The Benefits

There are going to be benefits though it depends on who you are. On the bright side, appraisers can no longer be coerced into inflating the value of a home which means you could, theoretically, not get stuck in an overvalued house again.

But here’s the biggest benefit of all: Banks can now own up to 20% of an AMC and will profit from the widespread use of AMCs versus independent appraisers. This doesn’t benefit you, the consumer and/or agent, but isn’t that what taking one for the team is all about?

What do you think about HVCC? Have you experienced delayed closings, higher costs and other havoc created by this change to the mortgage process or have you found great value in the changes?

About the Author: Joshua Ferris is an Associate Real Estate Broker in the lower Hudson Valley New York area. Learn more about Rockland County real estate including neighborhoods like The Harbors at Haverstraw by visiting Josh’s website.

Image Credit: Editor B

Further Reading on HVCC:

HVCC: The Cure is Worse Than the Disease (via Appraisal Press)

Notes from WAMP’s Meeting on HVCC (via Rain City Guide)