I’ve been waiting for the right time to write an article on the new Home Value Code of Conduct (HVCC) rules that went into effect in May. HVCC is another example of curing dandruff through decapitation.
HVCC basically creates a firewall between lenders and residential appraisers. Much of the mortgage meltdown is blamed on appraisers being pressured to artificially inflate the value of a property in order to seal a deal between a buyer and a seller.
A few years ago, when there was an enormous imbalance in the housing market that favored sellers, prices were escalating at a remarkable pace. Also, as I predicted correctly many times, prices were escalating at an unsustainable pace.
In order for buyers to have their offers taken seriously, they would often waive standard contingencies such as financing, inspection and appraisal reports. In some areas, price escalation clauses became the norm.
New York Attorney General Andrew Cuomo spearheaded the HVCC because he decided that all lenders and appraisers were in bed together to jack up home values in order to get deals done.
There is no question that there are instances where appraisers have been pressured to “hit the magic number.” However, the HVCC is not an effective cure to the problem.
Lenders and mortgage brokers are now forbidden to choose their own appraiser. Appraisals must be ordered through an independent portal system to ensure that there’s no hanky-panky.
Unfortunately, these kinds of blanket rules cause some ill side effects. While HVCC will definitely ensure that there will be no lender pressure on the appraiser to hit a particular number, it’s also pretty evident that HVCC is bringing incompetence and inaccuracies into the reports.
A neighbor of mine who’s an appraiser in Charleston, S.C., describes a scenario that makes me laugh. It seems a small-town appraiser was randomly assigned to appraise a property in the high-end beach market of Kiawah Island.
My neighbor received a phone call from the appraiser asking for directions to Kiawah Island. The appraiser was so unfamiliar with the area he couldn’t even find it on a map.
Needless to say, the appraiser used poorly chosen comparables and came up with a value far lower than the purchase price.
There have been numerous reports of appraisers using comparable properties that were sold in distressed situations, such as short sales and foreclosed homes. While foreclosures and short sales have skyrocketed in the last couple of years, these transactions should not be used to gauge market value.
Despite the government’s well-advertised declaration to alleviate the credit crunch and reinvigorate the housing market, the government is, well-intentioned or not, creating enough obstacles to accomplish the exact opposite. The HVCC is a perfect example.
Henry Savage is president of PMC Mortgage in Alexandria. You may reach him at firstname.lastname@example.org.