Friday, May 29, 2009

New Rules on Appraisals

In order to achieve the independence and accuracy of the appraisal process, effective May 1st, 2009, Fannie Mae and Freddie Mac have adopted the new regulations governing appraisals. The new rules, known as Home Valuation Code of Conduct (HVCC):

• Prohibits lenders from accepting appraisal report where the mortgage broker (or real estate agents) had a role in selecting, retaining, or compensating the appraiser
• Require absolute independence between in-house appraisers and loan production within lender’s organization
• Only applicable to 1-4 unit single family residential
• Government-insured loans are exempt

HVCC is not even a month old, but many people are unhappy with the execution. Yes, the purpose is good, which is to stop unethical mortgage brokers’ influence on inflating the price. Property values were over inflated during the boom, and that is one of the reasons of today’s mortgage meltdown. The new policies should give us more reliable appraisals and less fraud. In reality these are some of the unintended consequences:

• Even though ordering from Appraisal Management Company (AMC) is not required, and a lender may order appraisals directly from an individual appraiser, what most happen is, a mortgage broker orders appraisal, directed by a lender to a specifically authorized AMC.
• The existence of AMC means, consumers pay more for appraisals, while appraisers make less, because AMC retains percentage of the fees.
• The relationship long established between the ethical appraisers and brokers are gone, and inexperience appraisers from AMC may be assigned instead. This cause delay and longer escrow time, and the quality of the appraisal report may suffer.

Further detail on HVCC, can be found here.

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