New Rules Hamper Housing Market

by October 14, 2009 • 6 comments

I will be the first to agree that the mortgage industry was extremely under-regulated for years and feel that lack of oversight, among other things, was largely responsible for the collapse of the housing market and subsequent financial crisis we now find ourselves in. But two of the most significant changes we’ve seen in years, both designed to protect consumers and reign in unscrupulous lenders, have done more to hamper the housing recovery than provide better consumer protections.

The HVCC, or Home Valuation Code of Conduct which went into effect this past spring, sets out clear rules pertaining to the entire appraisal process. No longer can a loan officer select an appraiser for a specific property based on its location, construction or intended use. Rather, a random computer program selects an appraiser from the bank’s approved list of appraisers and that appraiser either accepts it or denies it. This makes it very difficult for the lender to determine the cost of the appraisal and I have appraisal fees that range for $400 to $600 depending on the appraiser that accepts the order. No one in the organization who has a financial incentive if the loan closes (i.e. the loan officer) can speak to the appraiser. In fact, the listing and selling agents as well as the buyer and seller are generally expected to have no contact under the new rules. We are not to ask for a rush. We are not to question their comparables or approach to their value. We’re basically stuck with whatever we get. In the past, I would use various appraisers based on their familiarity with the area or the property type. Now we can end up with a single-family appraiser from northern Walton County assigned to do an appraisal for a Panama City Beach high-rise condo. In my opinion, these well intentioned new rules do little to protect the consumer or hinder appraisal fraud.

Another recent change to the Federal Truth in Lending Laws, and in particular changes to Regulation Z which concerns disclosure of APR, has thrown another wrench in the gears. New tolerances for variances between the initial disclosure at the time of application and that based on the final settlement figures along with new re-disclosure requirements are causing delays in closings, confusion among borrowers and frustration on the part of lenders. While most competent loan officers can provide very realistic and accurate estimates at application, they can only go on what they know at the time. Yes, the contract helps but without a preliminary HUD-1 settlement statement it is very difficult to be exact. The problem is that a preliminary settlement statement may not be available until a week or two after application. Even subtle changes in fees can cause a change in the APR requiring re-disclosure under the new tighter tolerances. The problem is that now, if a new Truth in Lending is required, it must be mailed to the borrower six business days before closing. So if a lender discovers on Monday that the APR is more than 1/8% different, higher or lower, and was supposed to close on Friday, he will have to get actual signatures from the borrowers by the end of the business day or they will not be able to close on Friday. This because even with the borrower’s signatures on the re-disclosed Truth in Lending, you still must wait three business days. The new rules, which went into effect for applications taken on or after July 30th, started creating problems in September and though we work diligently to be as accurate as we can possibly be there is no way to stop these new rules from delaying more closings, causing borrower’s rates to expire, etc. This is another example of a well intended change creating adverse effects for borrowers and the housing market in general.

On a bright note, mortgage rates remain near record lows with the thirty-year, fixed-rate right at 5%. We have seen some increased volatility lately so I am advising any of my customers who are floating to lock their rates in now. There is also more talk of the extending the first-time homebuyer tax credit beyond November 30th. Hopefully, we will know more soon.

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1 Appraiser Man October 14, 2009 at 8:45 pm

I am a residential appraiser in Alabama (AL certified appraiser since 1994), but I own a condo in PC Beach, therefore I read this web site daily. Great article.

The HVCC has almost single handedly eliminated all personal business relationships that appraisers have developed over the years. Because thanks to HVCC, most all appraisals are required to be ordered through National Appraisal Management Companies (AMC’s). There are no personal business relationships with these companies. Appraisers are just a number to these companies. These AMC’s want shorter turn times, more information, and LOWER appraisal fees. The borrower may pay their lender $400 – $600 as an appraisal fee, but the appraiser may only get $200 – $300 of this, the rest goes to pay the AMC. When I started in appraisal in 1992 as a trainee, we charged $300 for a single family residential appraisal. Now in 2009, we are lucky if we receive $350. I am at a point where I cannot get more efficient and fees and volume of work are going down, while everything else in life is going up. This seems to be a recipe for financial disaster. I do not mind shorter turn times and additional info in the report, but I would like to be paid a fair fee for my time. There is a lot more to completing an appraisal that what the homeowner sees us do while we are at their house. It can now take 3-6 hours “work time”, sometimes longer in rural areas, after we have inspected the house.

Do not get too worked up about how far an appraiser travels to perform an appraisal assignment. Most appraisers I know cover multiple counties in order to have a chance and making a decent living. The guy from North Walton County that comes to PC Beach may be as much or more knowledgeable that a guy that lives in PC Beach. You cannot fault a guy because of where he chooses to live. Most appraisers that work in various different areas have access to the same MLS info, and many AMC’s only want comparable data from a MLS system. My state of AL license says that I can work in any county in the state of AL as long as I make myself knowledgeable about the market that I am working in. This knowledge can come from self study or associating yourself with someone in the area that knows the particular market you are appraising in. I am pretty sure FL is the same way.

No one seems to get to worked up over the fact that the people that order appraisals from us, for the local areas we serve, may be in Pittsburgh, PA, San Diego, CA, or other parts of the world. In other words, the people ordering appraisals now know nothing about these areas we work in, and in most cases have never heard of the cities we work in. One AMC I am associated with has a call center in India that orders appraisals. What kind of sense does that make? Needless to say communication with someone in India about a property in Alabama is a problem.
I am not sure where we are headed but I am sure that many residential appraisers will choose to leave the profession due to HVCC and the weak national real estate market. Many of the appraisers I suspect that will leave the profession will be experienced appraisers, not the new and inexperienced appraisers.

Anyway, just my two cents as a frustrated appraiser. Keep up the good articles, pcbdaily is the best site available for PC Beach info.


2 Jake October 14, 2009 at 9:35 pm

I am a Certified Residential Appraiser and the HVCC has really become a VERY frustrating issue for appraisers. I can not speak to any of the issues regarding the new lending rules & regulations, but I would like to clarify one huge misconception regarding appraisal fees.
In order to receive work and be included on approved appraisal panels, we as appraisers have had to agree to SIGNIFICANTLY lower fees now that appraisal management companies have evolved. I think this is important for agents, lenders, and the general public to understand. The fee shown on the HUD-1 for the appraisal is rarely what we are actually paid. The additional cost is to pay the staff of the appraisal management company (which did not exist as few as 6 months ago). In many cases we are asked to do appraisals for more than ½ of our normal fee, yet then the HUD-1 reflects a fee of $150-$250 more than the typical fee we would charge for the report completed for the lender if we were contracted directly.
The other issue I would like to touch on is the misconception that the HVCC requires lenders to use AMCs (appraisal management companies). The reality is that the use of AMC’s is NOT required by the HVCC. Lenders may engage appraisers directly without the use of a third party.
I believe that the core of the problem with the HVCC is that very little industry-wide documentation or approved classes for appraisers, mortgage professionals, and real estate professionals available. The online information that is available is so scattered and disorganized it would be hard to find an accurate answer. If possible, I would like to email you the latest release from the Appraisal Institute regarding HVCC myths.


3 Appraiser Man October 15, 2009 at 8:41 am

Jake, I agree with you 100%. But, “the misconception that the HVCC requires lenders to use AMCs (appraisal management companies). The reality is that the use of AMC’s is NOT required by the HVCC. Lenders may engage appraisers directly without the use of a third party”. I know banks and credit unions that do “in house” loans do not have to use AMC’s, nor do USDA rural home loans or FHA/HUD appraisals (which can still be ordered directly by mtg brokers). However, January of 2010, FHA/HUD will be adopting HVCC, therefore all of those orders from our personal business contacts that we have developed over the years will also be gone, and the fair appraisal fees we get for these FHA orders will be gone too.

But, over time, I figure that as long as the HVCC is in place, all lenders will shift to AMC’s (probably at the direction of the federal government) for all orders, so they can attempt to cover their rear ends. Just like FNMA and FHA/HUD do not require us to complete the Cost Approach (FHA does not require it on houses over 1 year old), 95% of all lenders/AMC’s I deal with want the cost approach. So once one group starts adopting one idea, others will soon follow. I know of one AMC that now requires all FHA approved appraisers (i.e. the federal government has said that this appraiser has the qualifications to perform FHA appraisals) to pass a test (written by the AMC) in order to be eligible to receive FHA orders through that AMC, regardless of whether you have one year or 20 years experience in FHA/HUD appraisal. Where does it stop?

It is funny and sad, that lenders/AMC’s now want appraisers to make determinations that only surveyors, structural engineers, home inspectors, title searchers, attorney’s, etc., are qualified to make, but they continually want to pay us less and less of a fee for our knowledge and time.

I think residential appraisal is a failing industry due to all of the unnecessary regulations placed upon us that have nothing to do with appraisal. Couple that with the fact that we are not allowed to charge for our time to investigate/analyze all of this info, it will only push more of us out of business. Maybe when that happens, that will qualify us for a government “bail out”. LOL


4 Carolyn King October 20, 2009 at 8:56 am

I happen to agree with you but not 100%. I disagree with your statement that “lack of oversight, among other things, was “largely” responsible for the collapse of the housing market and subsequent financial crisis we now find ourselves in”.

There may have been some “lack of oversight” but let us not forget the real cause of our financial crises was the huge Federal Governments push to make “Every Individual” a home owner whether they could afford a mortage or not.

The Federal Government forced lending institutions to give mortages to under qualified individuals. We can’t forget Freddy and Fanny nor all the political undertone, and pac money that was involved and is still involved.
Lack of oversight the major cause? Hardly!


5 Larry Couch October 20, 2009 at 10:54 am

Until an organization can self-regulate, it will be a mess. Every leave a couple of toddlers to their own divices? Clark Howard summed it up: we partied real hard for too long, now we’re paying the price. We’ve mortgaged our financial well-being for life style. Not everybody should be in a big house with a giant TV and Escalade. Real estate investors in good standing with a bank could get crazy loans by making a phone call. I don’t feel sorry for the real estate/banking industry … did it to themselves and made us pay the price.