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The HVCC:

A Primer for Lenders & Loan Officers

02/14/2008

The recently finalized version of the Home Valuation Code of Conduct has done a myriad of things to the lending industry. It has also sent shockwaves through the appraisal industry. Many people, from all sorts of backgrounds have jumped onto the proverbial soap box to offer very harsh criticisms about the Code. The time for complaining about it has come and gone, it is now time to look at the brighter side of the code. What can the code do to help you and the appraisers continue to make money.

The intent of this article is to offer some points and advice to using the HVCC. It is quite possible the changes won’t really affect you at all. I am going to move through the code in the sequence it was written.

Section 1

A. The HVCC starts off stating that an appraiser must be licensed or certified

a. Right away, I think it is obvious that when selecting an appraiser to move into an HVCC compliant rotation, that the lender/client should make sure each appraiser is the most qualified.

b. Appraising is a very complex field, and selecting appraisers that are certified over licensed is a good start. Certification is a higher level of licensure, and requires more education to get.

c. Don’t forget that appraisers who are also designated have made huge efforts to obtain top quality additional education and undergone pretty rigorous testing and other requirements. SRA, SRPA, IFA and several others are pretty well known designations.

i. One note here, many folks know that the designation MAI is a top tier commercial designation. While many MAI’s practice and perform residential work, they are primarily commercial appraisers. A good suggestion is to make sure you have a thorough background on any appraiser you want to add. Work samples, resumes and a review of their recently attended continuing education classes (CE cycles every 2 years) will tell you a good deal about their work loads. If they don’t take residential classes, they probably don’t do residential work. The bottom line is that any appraiser that you use should be fully familiar and perform the type of work you are ordering from the appraiser.

B. This section is pretty straight forward. No one should try to try and influence the appraiser’s value. This is a form of fraud that puts you and the appraiser, if found guilty, in violation of title 18 in the U.S. Code. Simply stated, it’s a crime.

a. I think it should be touched on regarding Appraisal Management Companies (AMC), since lenders are going with AMC’s. While there is no pressure being applied with most AMC’s, they do indirectly pressure appraisers regarding fees. Many of the large AMC’s hire appraisers and pay them substantially sub-par of what normal appraisers work for. Often, they also mark up the fees.

i. It is prudent for you to choose AMC’s that use competent appraisers. Well respected and good appraisers do not work for the fees many of these companies pay. What this means to you, the lender, is that your loans are being valued by appraisers that are willing to work for a substantially lower fee. More often than not, these same appraisers do not perform due diligence in their work file, resulting in questionable values.

ii. These same AMC’s essentially are double dipping by reducing the appraiser’s fee, and then tacking on a mark up above what the appraiser normally does

iii. For what the AMC’s are up charging you, it is very probable that a desktop review could be performed by an appraiser within the same market area, for less than the mark up. This allows a technical review, which will certainly show if the appraiser was on target.

iv. AMC’s are, for the most part, unregulated at this juncture. State Appraisal Boards do not have the authority to regulate the AMC’s yet. They are able to act how they see fit, and if left unchecked they will focus on the bottom line. In most regards they are allowing fees dictate who is and is not a competent appraiser. If appraiser A charges 250 dollars, they will get preference over an appraiser who charges 350 dollars. The difference in fee most likely is that the cheaper appraiser does not perform due diligence needed for the report. You really do get what you pay for.

v. The HVCC does prohibit anyone at the lender to ask for free value checks. Some folks call this a comp check, pencil search, tax record search. Whatever it is referred too, it is not ethical to ask an appraiser to spend 15 minutes trying to figure out a pre-value.

vi. You cannot fire an appraiser from rotation if they are simply not hitting value. They must do something wrong. That means they have to omit technique, falsify values, or otherwise do dishonest work. I am sure unethical and unprofessional conduct is a good reason to remove them as well.

1. If you do fire them you have to let them know, promptly, why. In the tort friendly society we live in, it should be a legitimate reason. Many appraisers have been “blacklisted” with no explanation.

C. You can still ask for additional information to help you understand the report from the appraiser. Things that are appropriate fall into the following list

1. Additional Comps

2. More comments

3. Explanations

4. Listings

5. Absorption rate and statistical support for check boxes

6. More images of the subject

7. Copies of information referred to in the report

8. Many other things…

b. If you ask for something that an appraiser cannot provide, such as additional sales, it is best to just have them explain, in detail why they cannot. It is not a matter of will or won’t, it comes down to the due diligence of the appraiser. If they can’t, they should be able to prove that.

c. Mortgage Brokers cannot select appraisers, as well as Real Estate agents can not be a part of selecting the appraiser.

d. Loan production staff can not INFLUENCE the selection of an appraiser for an assignment or for a rotational panel. This means that someone outside of the sales side of the lender must establish and maintain a list of compliant and ethical appraisers.

e. The lender cannot use an origination appraisal prepared by someone that works for the lender, an affiliate of the lender, an entity owned by the lender, or an appraiser that owns the lender.

f. No AMC owner by the lender can use those reports either.

D. The lender can employ and use appraisers to review, support quality control of appraisal reports, and other similar tasks.

E. IVPI ( Independent Valuation Protection Institute) will be set up to allow lenders to report appraisers who do not do quality work. It is also set up for appraisers to report and seek protection from the lenders who abuse their roles working along side appraisers. It will also allow consumers to report violations from either of the other parties regarding the valuation process.

F. Lenders are going to be required to do quality reviews on 10% of all appraisals done.

G. Lenders are required to report appraisers who do not perform to the par established by already existing laws. This includes technique, application of proper theory, and other items of due diligence.

H. The lenders are require to “certify, warrant, and represent that the appraisal report obtained” per the Code.

I. The code is not forcing a lender to order an appraisal, nor is it to affect the scope of work required of an appraiser.

Now that the HVCC is going to become a reality it is important that both lenders and appraisers do their best to adhere to the requirements. Some , from both industries, are very much up in arms regarding the HVCC. Some claim that it hurts existing business relationships between appraisers and lenders. Some feel that it is not enough to fix the problems. At he heart of the HVCC, it is intended to do good for the public trust.

If a lender selects it’s panel of appraisers carefully, using sound business choices, then we can all rest easier knowing the right thing has happened. Some lenders are using large AMC’s that will negate the process. It does no one any good to simply select an appraiser on fee and turn times on the reports. It is easy to see that the appraisers who charge the least, are doing less work. A normal appraiser cannot reduce fees as much as 50% below the normal rate, and still afford to do the work required to complete a quality report.

Often, one can read an article regarding the valuation industry and the topic of fees will be a major underlined theme in many articles. If a lender wants to take part in the flight back to quality that is underway right now, it needs to be understood that each appraisal report written is a unique piece of work. Every single property will have a set of things that are wonderful marketing aspects, and will have negative ones as well. Each report requires custom work. Some reports will share similar data and analysis, but forth most part the appraiser should be writing a new and a subjective report each and every time.

There has been a long standing opinion of appraisers from the lending side that believe the appraisal is just another form that any one of thousands of people could fill out. This attitude has led to a gross under valuation of the appraiser’s role. The HVCC does set out to level that somewhat. It also sets out to stop the corruption that did take place regarding influenced appraisal reports by loan originators that established unethical relationships with appraisers. It may not be the perfect answer, but with any type of change like this, nothing will ever be perfect.

These reasons are why to for us to get along, we have to go along with the HVCC. If every appraiser set out to provide the best valuation they could, and every lender set out to make every loan an ethical solution for their client, then both industries would make more money and feel good for it. There are no short cuts to doing the right thing.

Please feel free to contact me with any questions. I will be happy to re-post updates to this when I receive good ones that we can all learn from.

Woody Fincham

Certified Residential Appraiser

wfincham@braunappraisal.com