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On May 1, 2009, a new set of rules regarding the processing of appraisals for Fannie Mae and Freddie Mac loans went into effect. The Home Valuation Code of Conduct, or HVCC as it is known, was intended to curb fraudulent mortgages. This new code was in response to an investigation conducted by Andrew Cuomo (the Attorney General for New York) into the appraisal practices of Fannie Mae and Freddie Mac (GSEs or Government Sponsored Entities). Basically, Attorney General Cuomo agreed to stop the investigation if Fannie Mae and Freddie Mac would change their appraisal process.

The HVCC went into effect on May 1, 2009 and was intended to clean up the mortgage industry. Unfortunately, consumers, agents, mortgage brokers and appraisers have been severely impacted in the last few weeks.

The HVCC affects those people in the loan process that are compensated on a commission basis. Once a loan closes, mortgage brokers, loan officers and real estate agents and brokers are paid their commissions. These people are no longer allowed to communicate in any way with the appraiser assigned to their property. The problem is that many loan officers, brokers, real estate agents and brokers have spent many years developing business relationships with certain appraisers because of their professionalism, timeliness and superior quality of work. Now, these relationships are no longer useful. Instead of choosing appraisers based on their depth of knowledge about certain market areas, appraisers must now be chosen from a preapproved list or from and Appraisal Management Company.

Home buyers are adversely affected because of the increased cost of appraisals. Since appraisals are in the lender’s name, if a home buyer changes lenders, a new appraisal must be requested. This increase in time and cost to the mortgage process may trap some home buyers with lenders who are not currently meeting their needs. In addition, buyers may have longer rate locks or need to extend existing rate locks.

Most sellers are not in a position to reduce the sales price of their home to accommodate a low ball appraisal, so the contract falls apart. Consequently, a seller’s only option is to appeal the low appraisal. May’s statistics for new and existing home sales were up, but still fell short of market expectations. The National Federation of Mortgage Professionals, The National Association of Realtors and The National Association of Home Builders are pointing to issues with the Home Valuation Code of Conduct for this shortfall.

Appraisers are now the only industry with restrictions prohibiting communication with their customers. Remember, appraisers may not communicate with agents, loan officers, mortgage brokers or real estate brokers because they are paid on commission. Just as real estate agents pay a portion of their commission to their brokers, appraisers are required to pay approximately 40% of their income to the Appraisal Management Company with whom they work. These restrictions on communication and compensation could drive many experience appraisers out of the market and a time when we can least afford it.

The National Association of Realtors has requested regulators suspend HVCC rules for 18 months because of unintended consequences. Stories of low ball appraisals and their impact on the real estate industry are increasing all across the country. Buyers are not able to get loans because of these appraisals.

The truth is that appraisers are caught between lenders and regulators who want conservative appraisals and buyers, sellers and agents who just want to conduct business. Lenders and regulators want foreclosures and other distressed properties to be used in the appraisals. Buyers and sellers just want to buy their dream home or sell their existing home and move on. Prior to all this free money in the mortgage industry, a home was worth what someone was able and willing to pay for it. Oh, how I long for the good old days!