The HVCC Prolongs the Housing Slump

In March 2008, a joint agreement was announced between the Federal Housing Finance Agency, Freddie Mac, and Andrew Cuomo, the New York Attorney General, to institute the Home Valuation Code of Conduct, or HVCC. This code was intended to curb some of the worst excesses of appraisers acting on behalf of lenders by ensuring that appraisals reflected the accurate worth of property and that no undue influence was exerted on appraisers by lenders, real estate brokers, or local real estate agents. Initial reaction to the announcement was overwhelmingly positive; the HVCC was praised as a positive step during the aftermath of the subprime lending collapse and lauded as a much-needed change in the way appraisals were handled. The HVCC went into effect in May 2009, but most lending institutions began implementing it in advance of its effective date.

Unintended results were seen nearly immediately. Because the HVCC requires lenders to have no material influence over the appraisal process, independent appraisal management companies (AMCs) were formed to serve as middlemen between lending institutions and appraisers. Lenders still were paying about the same amount for their appraisals, but a sizable portion of that amount was going to the AMCs, so appraisers were being paid considerably less for the same work. This pay cut meant that less qualified and less experienced appraisers were being hired by the AMCs, resulting in less accurate appraisals. While the discrepancies were due to less competent appraisers rather than pressure from the lenders, the net effect of an inaccurate appraisal was precisely the same. Even when highly qualified appraisers were employed, the reduced payment per appraisal meant that those appraisers had to perform more property assessments in the same amount of time or suffer a pay cut; this also resulted in less accurate property appraisal. No oversight mechanism currently exists for AMCs, so these inaccurate appraisals are generally not reviewed or corrected.

One provision of the HVCC could potentially penalize lenders and appraisers for appraisals that overstate the property’s value. Fear of these penalties has led to perhaps the worst unintended side effect of all: the artificial devaluation of property. Many experts believe that the HVCC has actually prolonged the housing market slump by creating pressure for appraisers to bring in lower assessments of worth. Appraisers determine the value of property by looking at comparable properties and obtaining an average cost that similar homes or properties have sold for; in the current housing market, a percentage of those sales may have been due to foreclosure. The pressure to bring in lower appraisals has resulted in situations where homes are appraised at far less than their value on the housing market, preventing buyers from obtaining a mortgage for the fair value of the home and forcing owners to either sell their home at an artificially low price, or not sell it at all.

Consumer costs have risen by an estimated $2.8 billion due to the HVCC, according to the National Association of Mortgage Brokers. Since an entire level of bureaucracy has been added to the appraisal process, the additional cost is passed on to home buyers. Additionally, many home sales are lost due to the artificially low appraisals, which prevent financing from being approved. Experts believe that, far from addressing the real estate industry’s woes, the HVCC has actually contributed to them and prolonged the housing market slump.

Consumer protection agencies and housing industry leaders have organized petitions calling for a reversal of some of the HVCC’s provisions. On June 25, 2009, Congressman Travis Childers, a Mississippi Democrat, and Congressman Gary Miller, a California Republican, introduced a bipartisan bill that would impose an eighteen month moratorium on the provisions of the HVCC. This bill has been under review in the House Committee on Financial Services for some time, but promises relief for homeowners and new home buyers from the arbitrary and ill-conceived provisions of the HVCC.