Five down, five to go! In this installment of our top real estate developments of the decade, we examine an infamous issue for practitioners:

#6: HVCC

For a demonstration of the problems caused by the Home Valuation Code of Conduct (HVCC), adopted by Fannie and Freddie on May 1 of this year, look no further than this blog. Back in July, my colleague Rob Freedman published this post featuring a video interview with NAR policy analyst Jerome Nagy, which set off a firestorm of comments that criticized or defended the HVCC and appraisals generally.

As Rob and I noted at the time, neither the blog nor the video have anything especially controversial to say about the HVCC. The code itself was just that controversial. As with Tiger Woods’ recent peccadilloes, merely bringing the subject up could trigger a heated larger discussion about everything that went wrong and how to fix it.

So what, exactly, was wrong with the HVCC? Well, the most persistent criticism was that it led to more out-of-area appraisers assessing properties, but from the real estate professional’s perspective, it was more than that. Many of these appraisers—not being from the area—didn’t value homes correctly, the appraisals weren’t taking place in a reasonable amount of time, and in many cases, deals were falling through as a result.

Compounding the frustration was the fact that the HVCC was implemented in the worst real estate environment in more than a quarter century. The market was already tough enough as it was, and this made things even more difficult for practitioners.

But did the HVCC get a bad rap? Some think so. The trouble might not have been caused so much by the code itself as misinterpretations of it and poor practices of appraisal management companies (AMCs). And, of course, the timing didn’t help.

The HVCC—or at least the most problematic provisions of it—could be eliminated early in the next decade. The most likely route to its demise would be an amendment in the Consumer Financial Protection Act of 2009 that would sunset the code next year. That bill has made it through the House Financial Services Committee, but hasn’t been voted on in the House or Senate. However, Fannie, Freddie, and the FHA have essentially incorporated the HVCC into their own guidelines, so even that might not kill it altogether.

Regardless of the eventual outcome there, we’re stuck with HVCC—a system that more than one-third of REALTORS® say has caused a lost sale this year—for the rest of this decade.

Other Major Real Estate Developments of the Decade

1. Housing Goes Boom and Bust

2. The Fall of Fannie and Freddie

3. Government-Led Recovery

4. The Practitioner Explosion

5. Commercial Crash

7. Record Lows in Mortgage Rates

8. RE.net

9. Real Estate on TV

10. Going Green

The Home Valuation Code of Conduct is getting a bad rap for causing what real estate professionals say is a rise in inaccurate appraisals, Alfred Pollard told a packed room of REALTORS® Friday in a risk management-regulatory issues joint forum at the 2009 NAR Conference & Expo in San Diego.

Mark Johnson, chief operating officer of appraisal management company LSI.

Pollard, the general counsel for the Federal Housing Finance Agency (FHFA), said HVCC was released at a time when the economy was in a massive contraction—what he called a systemic event—and that this broader picture has to be taken into consideration when talking about valuation trends. “Concerns [over valuations] might not be 100-percent tied to this code,” he said.

FHFA oversees Fannie Mae and Freddie Mac, which earlier this year adopted HVCC and applied it nationwide in an agreement with the New York attorney general. HVCC expires in late 2010 but the two secondary mortgage market companies can retain all or parts of HVCC going forward.

Nor is it fair to rap all appraisal management companies (AMCs) for handing out valuation assignments to inexperienced or out-of-market appraisers who are willing to work for reduced fees, Mark Johnson, COO of LSI, a big AMC, said at the forum.

Any AMC that lets appraisers work outside their area of geographic competency is violating appraisal standards under USPAP and they should be reported, he said. “I do believe there have been some bad actors,” he said.

The average travel distance of the 20,000 appraisers in his company’s database is eight to 12 miles, he said. Any appraiser who wants to travel more than 25 miles under his company’s policy must explain why and get an OK. “We don’t want guys driving 50 miles,” he said. “We want to get rid of that guy [who goes outside his area of geographic competency].”

Steve White of Keller Williams Realty in Santa Clarita, Calif., and chair of NAR’s Risk Management Committee, said real estate professionals are losing deals because valuations are coming in far below the price agreed upon by the buyer and seller and that the process for getting valuations reconsidered doesn’t work.

Valuations are taking so long that there is no time to get them reconsidered before the deal collapses. What’s more, when real estate professionals try to share comparables or familiarize out-of area appraisers with unique market issues, appraisers say they can’t talk to them.

Pollard and Johnson said there’s nothing in HVCC that prohibits real estate professionals from sharing comparable or other information with appraisers. “You can talk; you just can’t drive them to a value,” said Pollard.

Johnson gave out an e-mail address, nar@lsi-lps.com, that goes directly to him that REALTORS® can use for sending in complaints if they believe one of LSI’s appraisers hasn’t produced a competent valuation or is inappropriately restricting them from sharing information. “Send me the name of the guy and let’s root him out,” he said.

“Nobody has asked to come in and look at our balance sheet, to go through our finances, which I’ve offered to everybody.”—FHA Commissioner David Stevens

News reports raising concerns that FHA might be the next major financial institution requiring a government infusion are based on misinformed comparisons with what happened in the subprime market, FHA Commissioner David Stevens said in an exclusive interview with REALTOR® Magazine this week.

At their peak, subprime lenders commanded 40 percent of the residential mortgage market by making low-downpayment, no-document, interest-only, and other types of exotic loans to high-risk borrowers, investors, and speculators, a market that FHA sat out entirely, says Stevens.

Today, it’s FHA that commands 40 percent of the market, but that’s where the comparison ends. The agency makes 30-year, fixed-rate, fully documented loans only for households buying their primary residence. For each loan, the agency maintains capital reserves for the full 30 years of the loan rather than for the 1-2 years required of banks.

Today, the agency has more than $30 billion in reserves, including a fully funded loan-loss reserve. All the talk in the media about reserves dipping below a 2-percent required threshold is about a secondary account that’s above and beyond the agency’s primary reserve. Those two accounts together represent more than 4 percent of assets, he says.

An actuarial audit of FHA finances due out in a few weeks from a non-governmental auditor is expected to find that FHA has sufficient capital to cover all forecasted losses, even assuming further delines in home prices, says Stevens.

“What concerns me, and I think should concern all REALTORS®, is . . . non-fact-based [criticism] from people who jump to conclusions without looking at data [and] create an environment where we’ll be forced to make corrections where they are not required and can hurt this housing recovery.”

Stevens sat down with the magazine for a 30-minute interview that covered the agency’s new appraisal policy and an upcoming mortgagee letter that’s expected to make condo financing more attractive as well as the agency’s credit health. He also talked about the improvements to the agency’s processing that makes it comparable to conventional lenders in terms of processing speed and paperwork requirements.

Listen to snippets of the conversation here:

1. FHA’s credit health (5:51)

“We’re the last financial services institution standing. We haven’t needed any kind of government bailout. We’re positively capitalized. As for risk, if we have some sort of double-dip recession, the impacts to FHA will be the same as to Chase Manhattan, Wells Fargo, the United States Treasury, and everybody else.” Edited excerpt—not verbatim

2. FHA vs. subprime lenders (2:39)

“FHA is not for investment, it’s not for speculation, everything is full-doc. During the boom years, with all those stated-income loans, a FICO score could have artificially gone higher simply because people were borrowing their way to good credit. So, if you didn’t verify their income, and if you didn’t verify their assets, you could have had a truly troubled borrower underneath that good credit picture.” Edited excerpt—not verbatim

3. Appraisal policy (HVCC) changes (2:27)

“No where in the Home Valuation Code of Conduct does it say lenders have to use an appraisal management company. No where does it say you have to pay appraisers less or get the appraiser to drive from a remote location where they don’t understand the market. I believe HVCC was founded on good principles, which is to keep an arm’s-length distance between the people ordering the appraisal and anybody who could benefit on a commission basis from the outcome of that appraisal. Our policy goes a step further and says you’re not required to use an appraisal management company, the appraiser should be from the local area and should understand the area (already required in USPAP), and the appraiser’s income should not be impacted adversely.” Edited excerpt—not verbatim

4. Condo financing (1:28)

“We will be introducing a new condo policy in the next couple of weeks that will make the terms easier than the terms that were originally planned to go in effect in our October 1 Mortgagee Letter (some aspects of which have been given a later effective date). People will applaud them as being an improvement, but we will continue to have risk controls in place for condos.” Edited excerpt—not verbatim

5. FHA processing speed (3:04)

“FHA can be underwritten by any FHA-approved lender, which includes most of the major lenders in America. We have high loan limits just like the temporary high loan limits for Freddie Mac and Fannie Mae. You can buy a home with 3.5 percent down. You can get your loan scored for approval through a variety of underwriting engines including Fannie Mae’s Desktop Underwriter and Freddie Mac’s Loan Prospector. If you aren’t familiar with FHA, the best you can do is sit down with a loan officer who does FHA mortgages and learn how easy it is today.” Edited excerpt—not verbatim

1. 6 Reasons Why Some Homes Sell
2. Tips for Getting a Good Appraisal
3. FHA Drops Lender on Suspicion of Fraud
4. IRS Cracking Down on False Tax Credit Claims
5. Feds Scold BoA, Wells Fargo on Loan Modifications

For weeks, NAR has been getting e-mails and phone calls on problems caused by the implementation of the Home Valuation Code of Conduct. If you’re not familiar with HVCC, it’s an agreement entered into between the two secondary mortgage market companies Fannie Mae and Feddie Mac and the State of New York. The intent of the agreement is laudable: to curb the kind of inaccurate appraisals that helped fuel the housing meltdown.

But HVCC has turned out to be a problem in its own right, judging from everything we’re hearing, and not just for real estate deals in New York. The two mortgage companies are applying HVCC rules to all mortgages they handle, regardless of state, so any problems with HVCC are nationwide in scope.

Here’s a sample of what our researchers found:

• 76 percent of practioners say the time to obtain a completed appraisal increased after May 1 (the date of HVCC implementation), with 69 percent of those saying the increase has been more than eight days.
• 37 percent says sales have been lost because of the appraisal rules, with 20 percent saying they’ve lost multiple sales. This is especially unfortunate, since market data suggests we have pent-up demand for housing.
• 70 percent say out-of-area appraisers have been used. This is important because our members say out-of-area appraisers can’t be counted on to have intimate knowledge of a market and can therefore miss details on comparables and other facts that can affect price.

These and other findings from the survey are preliminary, so there might be more information coming out of the survey in the next few weeks. What’s important is that NAR leaders and staff have some hard data to share when they talk with lawmakers and policymakers, as they’ve been doing for the past two weeks. NAR President Charles McMillan last week had meetings with the attorney general’s office in New York and with the Federal Housing Finance Agency (Fannie and Freddie’s conservator). The two mortgage companies were in that meeting with FHFA as well, as were apprasiers.

Congress is aware of the issue. There’s even a bill (H.R. 3044) to impose an 18-month moratorium on HVCC, but it’s unclear what will happen with that, since Congress is focused on health care reform this summer. (If you want to look at the bill, go to Congress.gov and search “H.R. 3044.”)

Given the amount of concern the issue has generated (a blog entry by one of NAR’s officers, Steve Brown, generated more than 150 comments), a good look at what’s happening is clearly needed. At a minimum, NAR’s findings give everyone some hard data to look at and consider.