New Code: Home Valuation Compliance Code (HVCC)

The mortgage industry has been buzzing ever since the new Home Valuation Compliance Code (HVCC) went into effect on May 1st 2009. The HVCC is a new policy agreed between Fannie Mae, Freddie Mac to only buy loans that were appraised according to the new code. Brought on by a lawsuit filed by New York State attorney General, Andrew Cuomo, against Washington Mutual, the code created a new entity called Appraisal Management Companies who have the task of keeping appraisers apart from the lenders' production staff (loan originators, mortgage brokers, etc).

In a news article by Diana Olick for CNBC, what appraisers used to earn for conducting appraisals now must be split with the new middlemen "Appraisal Management Companies." Adding to the Coals of Concern, Ms. Olick poses the following troublesome questions:


"Why is it that some of the largest banks in the country are allowed to have partial ownership in the Appraisal Management Companies ?? Isn’t this once again the fox watching the hen house??"

AND...

"If the whole idea is to get the appraisal system out of the banking/lending system, then why is it that First American Corp., still has joint venture appraisal management companies with: JP Morgan Chase (Quantrix), Citigroup (Finiti), Wells Fargo (Rels), making First American one of the largest Appraisal Management Companies in the nation? Oh, and there’s currently a class action lawsuit against Rels, claiming it rigged the appraisal process for Wells Fargo."


While the intent of the new code is well-meaning, the code's underpinnings may prove to be faulty and flawed, at best. Especially, if big banks are allowed to have ownership in these Appraisal Management Companies. It seems counterproductive to the original intent of the code, which is to separate the appraisal process from the lending process. I believe a new can of worms has made its way into the world. When policymakers create new laws without the proper checks and balances, the outcome of uncertainty and backlashes come down as a sobering reality.

In recent times, I have seen policies made with the same good intent that ended up doing more harm than good. For example, when the Distressed Property Law first took effect in Washington State, there were some areas of concern that caused many real estate professionals to become leary of showing distressed properties to buyers, or else they would become at risk of becoming inadvertent "Distressed Home Consultants," subject to a slew of disclosure and tedious contractual requirements prescribed the new law. It will be interesting to see how the mortgage and appraisal industry will adapt as the new HVCC policy becomes a universal reality for all appraisals of 1 to 4 family properties.

What does this all mean for real estate brokers, agents, buyers, and sellers? It means that this new process may likely require more time for escrow and closing in our purchase and sale agreements. The need to put time on our side has now become a paramount consideration for all involved. According to Fannie Mae (see "Scope of Coverage" section Q1), however, this new policy will not affect multifamily properties.

In the wake of this controversial policy, a new service has emerged. The Comp Search and Appraisal Dispute service. One such company claims that it is HVCC compliant and comprises a network of experienced appraisers who are familiar with the areas where properties are located. It's hard to say what changes, good or bad, this code will materialize, but one thing is for sure. If big banks are allowed to have an ownership stake in these Appraisal Management Company, then the point of this code becomes moot.