If you live in the Houston area, you may have seen the June 18th Chronicle article titled "Appraisals: New Bottom Line". It highlighted one of the recent casualties of the new Home Valuation Code of Conduct, or HVCC. (see http://www.freddiemac.com/singlefamily/home_valuation.html) A small Houston area home in the subdivision of Idylwood was contracted for close to the asking price of $243,000, but when the appraisal came in at $206,000 the deal fell apart. Fortunately in this case the owner had the benefit of a still relatively healthy real estate market on his side. The house was quickly back under contract, and it actually closed last week for close to asking price. The solution in this case: A cash buyer!
That the appraisal could come in some $35,000 below the actual closed sale price calls into question the implementation of the new appraisal code. The new code went into effect May 1st, and it has attracted increasing attention because of its impact on the real estate and mortgage market. The National Association of Realtors (NAR) has called for an 18 month moratorium on the code until it can be further evaluated and refined.
Flaws in the new code are already becoming apparent. For one, it does not prohibit lenders (the same big banks that got us in the mess in the first place) from having an ownership stake in the appraisal management companies (AMC's) they are ordering reports from. Common sense seems to have been thrown out the window.
Higher costs to borrowers are already being experienced with the new system. I have spoken with originators directly about their experience with the new system and the changes to their good faith estimates. They are bumping up their fees for applications and/or appraisals on their quotes to account for the higher costs of the new system. It's no surprise that when you add a middle-man (AMC) into the system, the eventual cost is going to rise. Turn-around times for appraisals have also increased, causing delays in closings and/or added fees.
Perhaps the most glaring evidence against the ill-conceived HVCC are cash transactions like this recent Houston deal where the actual market value is validated by a closed sale. The bad news for many prospective home buyers and sellers is that it is going to take a lot more cash transactions to expose the HVCC for the well-intended, fatally flawed mess that it is. Market value is the point at which a willing buyer and seller come together to consummate an arms-length transaction. The HVCC is bastardizing the whole concept of market value based on objective statistics and data. The reality, however, is that you can't compare a foreclosure with years of deferred maintenance to a completely remodeled, move-in ready home. That's the reason appraisers are supposed to look for the most relevant comparable sales, not just 3 comparable sales.
As this recent article from the Florida Sentinel points out, the new HVCC has some seriously negative implications for the real estate industry as well as homeowners. http://www.orlandosentinel.com/business/orl-cfbcover-appraisers-cfb-062909062909jun29,0,7417063.story
At a time when the government is looking for ways too bolster the real estate market, the HVCC is jeopardizing any stabilization or rebound. For stronger markets like Katy or Houston Texas, it will likely derail more transactions and depress the market. Under the new HVCC, many borrowers are going to be forced to bring more money to the table to close a transaction or re-negotiate with a seller to reduce the contract price. Market value may become a luxury afforded to only the strongest cash buyers.
It's a bit ironic that big banks pushed sales higher and higher while lowering, and in many cases, virtually eliminating underwriting standards. Now these same banks only want to lend to AAA borrowers with high credit scores and large down payments. Meanwhile, the average borrower is getting strangled with tighter underwriting standards and the new home valuation code of conduct.
If you have had a recent experience with the new Home Valuation Code of Conduct, I invite you to post your comments. If you would like to sign the petition to have the HVCC scrapped, you can visit this link... http://www.hvccpetition.com/
