If you're thinking about buying a home or refinancing your current mortgage, you're going to need an appraisal so the lender has an accurate evaluation of what the property is worth. But recently, that's gotten a bit more complicated, thanks to a new rule called the Home Valuation Code of Conduct.

If you're thinking about buying a home or refinancing your current mortgage, you're going to need an appraisal so the lender has an accurate evaluation of what the property is worth. But recently, that's gotten a bit more complicated, thanks to a new rule called the Home Valuation Code of Conduct.

The HVCC, as it's known, is designed to shield appraisers from inappropriate pressure to overvalue a property so a mortgage or refinance can be approved. But since going into effect on May 1, it's drawn howls of protest from mortgage brokers, realtors and some appraisers, who blame it for everything from slowing down the loan approval process to sabotaging legitimate home sales to raising the fees consumers pay.

The HVCC isn't actually a law, or even a regulation. Instead, it's a set of guidelines adopted by government-backed lenders Fannie Mae and Freddie Mac, outlining procedures that must be followed in originating any mortgage that they purchase on the secondary market. But since Fannie and Freddie end up purchasing about 80 percent of all U.S. mortgages, and are the primary source of ongoing liquidity for most mortgage lenders, the rules pretty much govern the whole U.S. mortgage market by default.

Rule seeks to eliminate collusion

The practice of overvaluing appraisals in order to secure approval for a mortgage has been blamed in part for artificially inflating housing prices and contributing to the eventual collapse of the market in mortgage-backed securities, resulting in the current economic crisis. To prevent this from happening again, the HVCC prohibits mortgage brokers and lenders from hiring their own appraisers to evaluate a property. This means they typically go through a third party, called appraisal management companies (AMCs), which assign appraisers on a case-by-case basis.

As one might expect, the new system has generated a number of complaints. The first is that it's raised the cost of appraisals, since the management company gets its share. An appraisal that might have cost $200-$300 in the past might now cost $400 or more, to cover the added cost of the middleman.

Some lenders and real estate agents also claim that the appraisers working for AMCs aren't as skilled as the more highly paid independent appraisers (who keep the whole fee for themselves), leading to botched appraisals and sales falling through.

Foreclosures drag down values

Groups such as the National Association of Realtors have complained that AMCs are assigning out-of-town appraisers who aren't familiar with local markets, and who are giving undue weight to sales of foreclosed and distressed properties, resulting in appraisals that fall below the true market value, causing mortgage applications to be rejected and home sales to fall through.

Defenders of the new rule, including many appraisers, say that it only makes sense to include sales of foreclosed properties in making an appraisal, noting that they have an influence on the market. After all, they note, a key purpose of an appraisal is to determine what a lender will be able to recover through foreclosure if the borrower defaults.

The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie, has recently issued clarifying guidelines emphasizing that AMCs should appoint only appraisers who are familiar with the community in question.

The new rules have also been blamed for delaying the mortgage approval process. However, with credit standards tightening and lenders taking extra care in approving new loans, this was already happening before the new rules took effect.

Multiple appraisals could be needed

One other major change is that the appraisal is now ordered by the lender, rather than a mortgage broker. This means a broker can no longer present a single appraisal to multiple lenders in shopping for a loan; instead, a lender contacts an AMC to order an appraisal, though the purchaser pays for it. The problem here is that if a borrower wants to shop around to different lenders after the appraisal is done, other lenders may insist on having their own appraisals, rather than accepting the one done for the original lender. However, in most cases this should not be a problem, particularly if the first appraisal meets the other lender's standards.

The key things to remember if you're shopping for a home or mortgage refinance is to remember that the appraisal is going to cost more and the overall process is going to take more time than before, probably a week or so. Also, be sure to have your lender verify that the appraiser is familiar with the community the property is in, particularly if your first appraisal comes in too low to support the mortgage. Under the new rules, you and the lender can't select an appraiser yourselves, but you certainly have the right to insist that the AMC send someone who is qualified to assess the property you're looking to finance.

Published on July 28, 2009