Problems with the HVCC
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As of May 1st, 2009, recent legislation introduced by Andrew Cuomo and the New York Attorney General’s office known as the Home Valuation Code of Conduct (HVCC) has gone into effect.  Although many of the provisions of the bill are very positive, there are ill-conceived portions of this legislation that are likely to have catastrophic effects on the Appraisal Industry, many small Appraisal businesses, individual Licensed and Certified Appraisers, and eventually the general public.  The new regulations will also have serious repercussions in the real estate sales and mortgage industries as well.


For years the National Association of Independent Fee Appraisers (NAIFA) and the Appraisal Institute have been encouraging politicians to enact legislation that would regulate Mortgage Companies, and prevent their employees from pressuring Appraisers to inflate the value of appraisals, and from engaging in other unethical practices that corrupt the effectiveness of the Appraisal Process.  The pressure applied, primarily from Mortgage Brokerages, was making it nearly impossible for Appraisers that were willing to work with Mortgage Brokerages, to conduct business in an ethical manner, fully compliant with existing laws and regulations.  Pressure from Loan Officers to produce appraisals that would “make their deals work,” have placed the public at risk by allowing homeowners to over-extend their capacity to pay back loans, and have placed banks and other lending institutions in jeopardy.  Requests from Mortgage Lenders asking Appraisers to engage in activities that were unethical or illegal were a regular daily occurrence. 


On the surface, the HVCC appears to solve these problems previously faced by Appraisers, as well as provide assurances that the current crisis faced by Fannie Mae and Freddie Mac will be resolved.  For the most part, Appraisers from the NAIFA have approached this new regulation with an open mind.  Unfortunately, now that the May 1st deadline has come and gone, the eventual consequences of the HVCC to Appraisers and Appraisal businesses are becoming increasingly clear.  Whether it was intended or not, the HVCC has effectively forced all of the major lending institutions to order residential appraisals through intermediaries known as Appraisal Management Companies (AMC’s).   As it stands, most lending institutions have shifted to using these intermediaries, the largest of which are owned by the largest banks in the country.


It appears the New York Attorney General believed AMC’s would create a firewall between Appraisers and Lenders that would solve the lender pressure issue.  Unfortunately, Appraisal Management Companies create an entirely new set of problems which were not accounted for by this legislation.  First, many lenders feel impelled to utilize the AMC’s as the HVCC certainly leads them in this direction.  As a result, good Appraisal Businesses which have been faithfully serving the public and their clients for years are having their clients forced into ordering appraisals through the Appraisal Management Companies.  The AMC’s have essentially been handed the majority of the country’s appraisal business without having to fairly compete with existing Appraisal Businesses.  This action violates every aspect of the concept of free enterprise.  

It is unlikely Appraisers have anything against the concept of intermediaries.  The idea of a “go-between” or “firewall” certainly has its merits, and could provide answers to national lending companies that have never had to work directly with local Appraisal Businesses before.  The problem Appraisers have is that the AMC’s do not generally make their living by charging the banks and lending companies for their services.  The vast majority of the AMC’s earn their profit by taking significant portions of appraisal fees away from the Appraisers.  These cuts generally run anywhere from 35% to as much as 50% of an Appraiser’s fee.  As the Appraisal business was very competitive to begin with, it does not take an in-depth understanding of economics to see how this practice will force many good, reputable local Appraisal Companies out of business. 


The fees paid to appraisers by the AMC’s are generally predatory in nature.  They are set high enough that local Appraisal Companies will not be able to compete for appraiser employees, but the fees are also too low for existing Appraisal Companies to work with.  Newly licensed Appraisers are being lured away from reputable companies that have been the backbone of the appraisal business for years.  This action has serious consequences on the development of  new Appraisers.  Although an Appraiser is eligible for licensing after approximately 2 years of training, experienced appraisers generally agree that an Appraiser needs at least 5 years of experience before they are fully competent to handle most any assignment, and operate as an independent contractor.  As the AMC’s have little stake in the development of new talent, many appraisers will never get the guidance, training and experience required to be fully competent in this increasingly complex field.


The consequence of the business environment created by the HVCC will be the eventual “dumbing down” of the appraisal industry.  Competent Appraisers and Appraisal companies will eventually disappear as they are not able to compete with the Appraisal Management Companies.  The most talented people in the field will eventually find work in better paying industries.  Capable young individuals with good technical abilities will be attracted into professions like engineering, accounting, finance and computers where they will be able to earn better wages, and be better able support their families.  It is unlikely the HVCC was ever intended to have these negative effects, but the foreseeable consequences of this legislation are unmistakable. 


Appraiser’s are the public’s very best defense against over-extending their resources, mortgage fraud, real estate related bank failures and other problems associated with over-valuation of collateral.  There is currently no better way available to determine the value of real estate than the use of a well trained Appraiser.


The solution to these problems is not necessarily to eliminate the HVCC, but to allow lending institutions to continue ordering appraisals from local Appraisal Companies via an acceptable medium.  Existing services that allow Appraisers to receive orders directly from lending institutions, in a nature that is in consistent with the intended objectives of the HVCC, are portals such as Appraisal Port, the Encompass Network and through existing appraisal websites offered by software companies such as Alamode IndustriesThese avenues allow appraisals to be ordered from actual appraisal companies without direct lender-appraiser contact.  There are also several existing Appraiser Directory websites that could be used as an appraisal ordering intermediary.  Allowing the use of such services that are in the spirit of the HVCC, will allow Appraisers and existing Appraisal Companies to compete fairly with the Appraisal Management Companies. 


Also, legislation that would regulate AMC’s that use predatory business practices would encourage AMC’s to stand on their own two feet, and eliminate the parasitic nature of these entities.  Such legislation might actually create harmony between the two industries (Appraisers and AMC’s), and lead to mutually beneficial business relationships that support the intended objectives of the HVCC.


Subpages (2): Fixing the HVCC HVCC