Origination News Feature Story

Eyeing HVCC in Sales Woes

By Brian Collins

WASHINGTON-Builders, real estate agents and mortgage brokers are noticing more sales transactions getting tripped up and they are blaming appraisers and implementation of a new appraisal code that went into effect May 1.

Industry officials are concerned that appraisers have become too conservative in valuing properties. And some contend it is inappropriate to use distressed sales as comparables in transactions where willing buyers and willing sellers have agreed on a price.

Meanwhile, trade groups like the National Association of Realtors are fielding complaints from their members and trying to quantify the extent of the problem.

"We are getting bombarded with calls by members who say sale transactions are falling apart," NAR chief economist Lawrence Yun said. Agents are telling us that appraisals are coming in at the last minute with "unrealistically low values."

The National Association of Home Builders and the Realtors are warning regulators that current appraisal practices could forestall a recovery in the housing sector.

The NAHB wants the regulators to enforce standards that would stop appraisers from valuing newly constructed homes at distressed sale prices. Valuing new homes at prices below replacement value doesn't make sense, NAHB executive vice president and chief executive Jerry Howard said. "It is one of the components of why home sales are not rebounding," he said in an interview.

The Realtors want an 18-month moratorium placed on the Home Valuation Code of Conduct that Fannie Mae and Freddie Mac adopted two months ago.

Reps. Gary Miller, R-Calif., and Travis Childers, D-Miss., have introduced a bill in Congress that directs the GSE regulator - the Federal Housing Finance Agency - to suspend the HVCC for 18 months.

The code was developed as part of a settlement that Fannie and Freddie entered into with New York attorney general Andrew Cuomo to prevent appraisal fraud.

The National Association of Mortgage Brokers has opposed the HVCC from the start because it prohibits brokers and loan officers from choosing or influencing the selection of appraisers.

The mortgage brokers warned early on that the code would delay closings and increase costs for consumers, said NAMB executive vice president Roy DeLoach.

Some consumers that tried to refinance at below 5% rates "got cheated out of those mortgage rates by the HVCC," Mr. DeLoach said.

The code encourages banks to use appraisal management companies that generally bid out appraisal assignments instead of paying standard fees. Many banks have been using AMCs for their retail originations for several years and several large banks have joint ventures with the AMCs.

Critics argue that AMCs generally hire appraisers that will produce the fastest and cheapest appraisals and say this is a problem.

"We strongly disagree with that," said Anne Canfield, executive director of the Consumer Mortgage Coalition. "The appraisal management companies have led the industry in best practices and technology and are making sure the appraisals are accurate."

CMC members include some banks that own AMCs.

But real estate agents are complaining that appraisals are being conducted by nonlocal appraisers who are using noncomparable properties and relying on computer models, Mr. Yun said.

The American Bankers Association doesn't like the way the HVCC was developed, said ABA vice president Joe Pigg. "But at this point, we are not hearing the same kind of complaints from our bankers," he said.

Appraisal Institute government affairs director Bill Garber said there is a lot of frustration among brokers and real estate agents with market conditions and the rapid depreciation in home values.

"But I don't buy this theory that appraisals are killing the deals. There is much more going on out there," he said.

The Appraisal Institute is concerned, however, that AMCs put a lot of pressure on appraisers to cut corners and produce the fastest and cheapest appraisals. "It is not healthy for mortgage lenders or consumers," Mr. Garber said.

Lenders One has signed up two AMCs to provide appraisal services for its member companies.

"We made sure our appraisal mortgage companies use qualified appraisers," said Scott Stern, the cooperative's chief executive.

But he is hearing "horror stories" about some AMCs. "You have in many cases less qualified appraisers who are not familiar with the local market doing appraisals," he said. "It is causing a problem with appraised values and it is delaying or destroying closings."

The Lenders One CEO expects the more qualified appraisers will mitigate into AMCs and the problem will solve itself over time.

"Appraisers should be hired on qualifications not just on their fee. That has got to happen sooner rather than later," Mr. Stern said.