Mortgage Q&A: Appraisal cure worse than problem

The Home Value Code of Conduct (HVCC) was enacted in May 2009. HVCC requires mortgage lenders and brokers to order appraisal reports through an independent management company. The idea is to prevent loan originators from unduly influencing an appraiser to “hit a number” that may be required to get a loan done.

I wrote about HVCC about a year ago and described it as “curing dandruff by decapitation.” A year later, my opinion hasn’t changed. Let’s recap.

While harmful and unethical pressure placed upon an appraiser by a loan officer may have been present in isolated areas or within a small number of lenders, it never appeared to be a major problem to me. The fact is, there already were a lot of safeguards to prevent this problem. Consider the following:

• Appraisal valuations must be supported by recent sales of similar homes near the subject property. An appraiser cannot simply place a value on a particular home without backing up his opinion with comparable sales.
• Appraisers must be licensed. I would imagine that, like any other licensed professional, most appraisers would avoid unethical or illegal activities to avoid being investigated.
• Appraisal reports are reviewed and approved by the lender’s underwriter. These folks are paid to examine the report to make sure the appraiser’s opinion of value is supported. Underwriters have access to public sales records. If an underwriter believes an appraiser omitted a good comparable because the sales price was low, it is up to him or her to ask the appraiser for an explanation.

As I said, I don’t deny some hanky-panky went on. What I am suggesting is HVCC tackled a relatively small problem while creating much bigger problems. Let me share a couple of stories:

• An appraiser from Cumberland, Md., appraised a property in Falls Church, Va., that was under contract for $350,000. She valued the property at $349,000. While this appraiser has every right to appraise the property at any value she believes is accurate, $1,000 under a price that an independent third party was willing to pay strikes me as odd.
• A Richmond, Va., appraiser was assigned to appraise a home in Alexandria, Va., for a refinance. The appraiser didn’t have the necessary software to gather data in Northern Virginia, so he asked the owners of the property if they could supply him with some recent sales. This struck me as ironic, considering HVCC was designed to make appraisal reports without any influence from interested parties.
• The randomness of valuation is becoming very evident with the current refinance boom. In October 2009, I helped a neighbor refinance his home. His appraisal came in at $500,000. Fast-forward to today, with rates lower; he has another zero-cost refi in the pipeline. His new report came in at $575,000 by a different appraiser. I cannot comment as to which value is more accurate, but I can tell you very few homes have sold in my neighborhood since last October, and the few sales that have occurred have not helped the values in the neighborhood.
• Here’s another example of why a homeowner should not have any expectation of value when he decides to refinance. The neighbor’s house that was appraised recently for $575,000 is a center-hall Colonial with 2,800 square feet, 4 bedrooms and 2½ baths. I recently refinanced another neighbor whose house is a block away. It’s also a center-hall Colonial, but much larger - 3,400 square feet with four bedrooms and 3½ baths. The lot is 50 percent larger, and the rear yard backs to woods. The $575,000 house looks out to a fence and another house. The superior home appraised for $515,000. Go figure.

Will HVCC be repealed? I have no idea, but it should be.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to henrysavage@pmcmortgage.com.

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