Congress recently passed the Dodd-Frank Wall Street Reform and Consumer Protection Act which is one of the most radical overhauls and reforms to the banking industry since the days of the Great Depression. This bill will fortunately put an end to the Home Valuation Code of Conduct (HVCC) which turned out to be an ill- advised attempt to revamp the residential appraisal system back on May 1, 2009. The HVCC impacted all Fannie Mae and Freddie Mac loans and has stirred up quite a bit of controversy within the real estate industry.
Congress’ goal with HVCC was to put an end to mortgage lenders putting pressure on local appraisers to inflate the values of properties. They saw this as a main reason for the real estate bubble and ultimate collapse and were determined to solve the problem. The problem is that they are lawmakers and not real estate professionals. The HVCC prohibited mortgage lenders from ordering an appraisal from their own roster of local appraisers. Instead, lenders had to order appraisals through an independent Appraisal Management Company or AMC. The problem with this system was that the local experienced appraisers who knew the values in the area were suddenly shut out while appraisers from outside the area were performing ineffective appraisals. Furthermore the AMC”s would let the appraisers compete for the business, and the one who would charge the least amount would get the majority of the work. We have all heard the phrase “you get what you pay for”. The end result in many cases was appraisals that were performed incorrectly. This resulted in continued frustration and additional expense to borrowers. The only winner was the AMC’s who would pay the least amount possible to the appraisers.
Under the new regulation the lender will still be required to order the appraisals through AMC’s. Now, however the appraisers must be paid a fee that is “customary and reasonable” for the market area. The home buyer should benefit by this new requirement as the quality of the appraisals will be better.
The Consumer Financial Protection Agency will soon be created to deal with these new procedures. This Agency’s goal is to “assure appraisal independence” through the issuance of new appraisal rules within 60 to 90 days from the date of the legislation’s enactment. The HVCC is set to sunset at the time the new legislation goes into effect.
Many questions remain however as to how these new rules will affect the real estate industry. Lets hope that Congress insists on full transparency between the lenders , AMC’s and appraisers. Only then can we assure that the borrower is getting a fair shake. More importantly, it is critical to the genuine recovery of our real estate market. So stay tuned for the next round.
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