Are new regulations causing home prices to decline?

by Tom Tousignant

in Blog, Home Buying, Mortgages, Refinancing

Since May 1st, 2009, all mortgage loans that were sold to Fannie Mae or Freddie Mac, the government run mortgage giants, have had to comply with a new regulation, the HVCC, or Home Valuation Code of Conduct.  This regulation is leading to an unintended consequence of declining home values.

The regulation, along with lender’s underwriting standards, is causing many home owners and home buyers to get much lower appraised values than they expected.

Key changes with appraisals over the past year.  In general:

  • Appraisers have to be selected from a blind pool by an appraisal management company(AMC). Loan officers are no longer allowed to talk with appraisers. (IS this a violation of my First Amendment rights??)
  • AMC’s are often using inexperienced appraisers that may or may not have knowledge of a local market. Since all real estate is local, an appraiser from 50 miles or more away from the house has the potential to make more mistakes or mis-value the house.
  • Appraisers can only use sales that closed in the last 90 days. In slower markets, or slow market segments, such as higher priced homes, no or few sales are making it very difficult to establish comparable sales.  Appraisers are only using the existing sales, so ‘un-comparable’ houses are used as comps.
  • The cost of implementing HVCC has increased closing costs by anywhere from $100-$200 per closing.
  • The Homeowner, buyer or seller has no recourse if the appraisal comes back with an unreasonably low value.

The irony of this regulation is that this process started when the NY Attorney General filed a lawsuit against now defunct Countrywide Home Loans and their AMC, Landsafe.  The NY AG charged that the AMC / Lender relationship was hurting consumers and causing inaccurate appraised values.  By the time the complaint was settled with the new HVCC,  lenders have to use an AMC and the AMC’s are growing and are making the big bucks – charging lenders more, and paying the appraisers less.

Additionally, with the AMC involved, turn times are slower, so it takes longer for borrowers to close their loans.  These longer turn times also increase costs as interest rates often have to be locked in for longer periods of time.  Imagine that – AMC’s get sued, and the result is that their business and profitability grows while the consumers (the original victims) are paying more money for lower quality.

Bottom line:  Home buyers and home owners that are refinancing are paying more money for an appraisal that is not always an accurate reflection of the real value.  This is keeping sales from happening at prices that both the seller and buyer agreed to, and keeping homeowners from being able to refinance their loans to lower interest rates.

What can you do about it? Not much, unfortunately.  Unless Fannie Mae and Freddie Mac choose to repeal the HVCC, home owners will be stuck with lower values, higher costs, and often times inaccurate appraisals.

In this case, the cry for regulations to protect consumers from bad appraisals has led to higher costs, slower response times, and an inferior appraisal report than the old system provided.

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