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August 5th, 2010

Guest Post: What I Think Is Wrong With HVCC

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The following guest post was contributed by Kris Taraz, Managing Director of Inhouse Capital Mortgage Services in Escondido, California. Kris has also lent his experience and opinions to some of our other content, including a blog post on the current state of the housing market and an article regarding the new good faith estimate (GFE).

There are many issues surrounding the home valuation code of conduct (HVCC) which certainly contribute to the elements that are slowing down the housing recovery.

Appraisals are ordered through a so-called management company which assigns an appraiser or an independent firm to conduct the home appraisal. The appraisers are usually not familiar with the area and no sufficient research is done to arrive at the true value of the property. This, in my opinion, cannot be blamed on appraisers, as they work almost for minimum wage (considering the cost of the commute, photos and research). An appraisal in California can cost anywhere from $385 to $450 or even higher depending on the size of the property. Almost 65% to 70% of that cost goes to the management company and the rest to an appraisal company which may have to split the fee with the actual appraiser.

Lenders and brokers have no control over choosing an appraiser, and they’re not even allowed to get an idea if the value of the home is within the customer’s range. Consequently, an actual appraisal has to be done and the borrower must pay the entire fee to obtain an actual appraisal report. In the past, lenders and brokers could easily contact an appraiser and find out if the value of the home is within reach so that the homeowner/ borrower could make a decision about whether to continue with their refinance or purchase transaction.

What is absolutely absurd is that banks do not accept the same appraisal report should the loan be placed with a different bank. For example, I placed a loan with a lender, and after the loan was underwritten I was informed that the property was in a rural area, and since the lender is very conservative, they declined the loan. Consequently, I contacted another bank and they indicated that they have no problem with properties in rural areas, so I placed the loan with them. But we still have to do a new appraisal! Again, this occurred despite the fact that the appraisal was just two weeks old and was already done by an HVCC-approved appraiser.

This in essence increases the cost for the borrower from $400 to $800. In addition, the value on the second appraisal may significantly be different from the first appraisal. In one recent refinance, we faced this issue when the value of a home arrived at $250,000 lower, simply because the appraiser selected comparables from a different town about one to two miles away.

Perhaps the most disturbing part of HVCC is that large commercial banks have ownership interest in these appraisal management companies and this has become an excellent source of revenue for them at the expense of the borrowers.

In the mean time, HVCC is stopping many from refinancing to a lower interest rate, taking cash out or purchasing a property and paying the desired price.

Considering the above regulation and its negative impact, no one should wonder why the housing market is continuing to crumble.

HSH’s update: For those of you out there — like our guest blogger Kris Taraz — who can’t wait to see HVCC disappear, you’re in luck: the president’s signature of the financial reform bill set the HVCC to sunset in just 90 days.

Readers: We encourage everyone to leave a (respectful) comment in reaction to Kris’ guest post!

*This post was originally published on 07/31/2010*

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6 Responses to “Guest Post: What I Think Is Wrong With HVCC”

  1. Seller Says: August 1st, 2010 at 12:18 pm

    Hasn’t the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21st, sunsetted the HVCC? Any ideas on the impact this will have on the current situation?

  2. Tim Manni Says: August 1st, 2010 at 5:58 pm

    Seller,

    Yes it has (see the “HSH Update” at the end of the post).

    As far as ” the impact this will have on the current situation,” this comes to mind first: here comes another change to a marketplace that has been so unsettled by constant changes and reforms to those changes. While many will tell you that HVCC was a poor system for appraisals, the sun setting forces those in the industry to adopt new practices, computer software, documents, etc. to prepare for the new way.

    Thanks for your comment, hope to hear from you again soon, thanks,
    Tim

  3. Lucia Says: August 6th, 2010 at 6:05 pm

    I’m not familiar with CA appraisers, but I’ve been an Oregon appraiser for 18 years and appraising is different here. The AMCs make sure the subject property to be appraised is within my geographical competency, and since I live in a rural area, that’s a 45 mile radius. My fees are the same as 10 years ago, while HVCC requires 50% more time and I feel I’m working more for less. But everyone else is earning less too in this economy, so why should I complain?

    When mortgage officers called me prior to HVCC for a “comp check” just so they would have some idea if they are wasting their time or not, I really wanted to help them out, but could not provide a range of values because appraisal standards call that an appraisal and to be compliant I would have to do a whole report. If I was a realtor, or a secretary, I could just look up data, but as a licensed appraiser, I would risk sanctions or fines from the appraiser licensure board. However, just this week I provided a website address for the county assessor’s sales to a loan officer so he could do his own “comp check.”

    The writer above complains that no longer can they cancel an appraisal if the value is below the needed loan amount and for that I’m very glad. Just imagine working 12 hours on a project and then being told you’re not going to get paid because you gave them a value over the phone? If I got paid on commission or on condition of a predetermined value, then I wouldn’t be an objective third party, and would be in violation of appraisal standards.

    When there are large discrepencies between appraised values by different appraisers, the recourse for the lender is to employ a review appraiser. I perform these quality and value checks on a regular basis and occasionally disagree with the appraised value either due to incompetency or significant errors.

    I will miss HVCC because it provided a firewall from lender, borrower and realtor pressure, which was so bad, towards the end of 2006 in particular, that I refused to answer my phone on Friday afternoons for fear of losing my mind.

    HVCC gave me protection, and AMCs made sure I was paid for every job. I don’t know what changes the lapse of HVCC will bring, but I probably will have to screen my calls again on Friday afternoons.

  4. ken, ca mtg broker Says: August 14th, 2010 at 2:34 am

    i’ve been a mortgage broker in california for the past twenty years. obviously, i have seen many ups and downs of markets, and have encountered and heard many abusive stories. HVCC in its present format does not work. the AMC companies are earning extravagant fees on these appraisals without doing as much as taking in the order, posting it up for appraiser assignements, and doing some basic clerical follow up. any clerk at any office could do those tasks in minutes. in my experiences, i see very poor quality work done by out of area appraisers who have no clue of the marketplace of the properties they are appraising. i have also encountered appraisers who, i believe, purposingly mention superficial flaws in the property (minor rips in carpet or minor cracks in drywalls) just to trigger a need for a 442 from the lenders. they earn another fee (usually $150) for this completion which probably takes him less than five minutes to complete.
    while i do believe the former appraisal arrangements needed reform because unscrupulous brokers and lenders exercise too much pressure on appraisers to manipulate values, i dont think current system does anyone any good. consumers end up paying almost 40% ($350 appraisals now cost upwards of $500+) higher for the finished product without any safeguard or prescreen of value to see if property is even within a reasonable expected range. lenders can spend hours and hours on a particular file only to have it fall apart on an appraised value that came out over 25% lower than expected. appraisers could have prevented hassles and costs on everyone by prescreening the values.
    the current format does not need to be eliminated as it does provide a safeguard from appraisers being pressured into value inflation, but it definitely require some tuning up.
    1) instead of using AMC to assign orders, use their pool of appraisers as a review center. lenders can still use order through their own network of appraisers, but every appraisal will be reviewed by the AMC’s group of local appraisers to confirm value. this way, any manipulation of value can be caught by the third party review appraiser who is unbiased, reviews the work and compare the data.
    OR
    2) keep the current system, but prior to actually charging the borrowers the fee, require the assigned appraiser to check data to make sure value is within a reasonable range (10-15%) of expectation. any good knowledgeable appraiser should be able to do this within minutes in any regularly developed area. if upon checking data, it appears value will fall outside of reasonable range, then inform borrowers and let them decide whether to proceed with transaction. this way, borrowers will have some safeguard to not spend hundreds of dollars on a product that will serve no purposes to them. and everyone involved can put brakes on the transaction much earlier in the process.

  5. Tim Manni Says: August 16th, 2010 at 11:07 am

    Ken,

    Thanks for a great comment — thanks for lending your expertise to your argument. I know you have provided some of your ideas for how you think the new appraisal system should work, but how do you think policy makers will construct the new system — will it resemble your ideas? Or do you think it will present a whole new host of problems?

    Thanks again,
    Tim

  6. HVCC bites Says: August 21st, 2011 at 1:03 pm

    I dread using the management pool. What they come up with for a value is not a true value. They do not reasercha dn just use zillow and tax assessed values. That’s not an appraisal.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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