It was three years ago today that the Home Valuation Code of Conduct (HVCC) began. It was designed to prevent conflicts of interest and fraud involving loan originators and appraisers during the appraisal process.

During the past three years, the incidence of fraud has increased, the quality of the appraisals has gone down, and the average home price has decreased.

While I won’t go in-depth as to the idea behind HVCC, let’s just say that an Attorney General in a Northeastern state decided that the loan officers were influencing appraisers to give greater values to homes than they should have, resulting in many of them owing more than their homes were currently worth. This has obviously gotten better since HVCC was initiated, right?

With HVCC in place, the loan officer was no longer able to choose the appraiser they wanted to utilize. While some probably used an appraiser that would give them whatever value they asked for to make the loan work, many had favorite appraisers simply because they DID A GOOD JOB! I define “good job” as providing a fair value, in a reasonable amount of time, in a good report that followed the rules and did not cause the underwriters to question their abilities or professionalism.

For HVCC to work, there had to be a neutral third-party that could order the appraisal and then do a quality check before providing it to the loan officer and underwriter. The Appraisal Management Company (AMC) doesn’t work for free, so the cost of the appraisals then increased somewhat. To add salt to the borrower’s wounds, the amount that the appraisers received decreased and many of the quality veteran appraisers left the industry taking their years of experience with them. I’m not alluding to the fact that the remaining appraisers are doing a poor job, but I have seen them drive 30+ miles from a different state to appraise a property that they know nothing about and cannot figure out how local values work in areas that have differences in marketability because they are on one side or the other of a street.

Because some of these appraisers ( I will not generalize) are scared that they will give too much value and be called out by an underwriter, they have become very conservative. VERY conservative. Hence the appraisal that came in about $100,000 lower than one done three years ago in an area that has seen slight increases in value over the past few years, but certainly not a 25% decrease. However, because of appraiser independence, it is very difficult to get a correction on such a glaring discrepancy.

To be clear, I am not knocking any of the quality appraisers that are still left, just the system. What should have been a step in the direction of helping the housing market stabilize has been three steps backwards. Since it’s implementation, we have seen higher costs to the consumers with lower valuations overall and higher incidents of fraud. Looks like it might be time to repeal HVCC before things get any worse.

Scott

Valparaiso, Indiana mortgage expert specializing in FHA, VA, and USDA Rural Development loans.