Sara Benson Real Estate Expert and Consumer Advocate Delivers Advice

Consumers May Soon See Relief From Faulty Appraisals

Posted in Real Estate by sarabensonexpert on August 10, 2010

Appraised $500,000 Low

Foreclosures and tight money have undermined the national housing recovery for years. But in May 2009, a new Home Valuation Code of Conduct (HVCC) began a silent but powerful wave of faulty and inaccurately low appraisals which continue to flood the real estate market in 2010.

Not a law and not approved by Congress, the HVCC is a “settlement agreement” between New York’s Attorney General Andrew Cuomo’s office and the nation’s largest mortgage finance companies, Fannie Mae and Freddie Mac.

Simply defined, the HVCC is a set of “guidelines” for banks that sell their mortgages to the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac.  Because the GSE giants now purchase only those loans that comply with the HVCC, the nation’s entire real estate market has been negatively influenced.

The HVCC supposedly was designed to protect consumers: it prevents banks from using their “preferred appraisers” and requires them to use, instead, generic “appraisal management companies.”   But the HVCC was poorly conceived. Its deleterious effects have caused (1) many qualified and experienced appraisers to leave the business, (2) appraisals to be performed by out-of area and unqualified appraisers, and (3) increased buyer’s closing costs.  The huge negative impact on the national real estate industry has served to encourage erosion of real estate values with severe consequences to both buyers and sellers.

A recent nationwide study of more than 100 real estate agents and brokers has charged that under the HVCC guidelines, the appraisal business has hit a new low for lack of quality, accuracy and professionalism.

Tim Kuptz, Broker Owner of ReMax Advantage in Las Vegas observes, “Las Vegas has had stable prices for twelve months now. The stability has been documented in trade publications and MLS statistics, and yet we are getting lowball values from appraisers.”  In 12 straight deals, Mr. Kuptz’s partner recently experienced appraised values coming in below contract prices at an average of 8.1% lower.

Kuptz noted with less than three month’s supply in inventory and despite multiple offers, “Appraisers are killing any real estate recovery in sight.”

What prompted the dramatic change in the appraisal industry? A lawsuit against a lender claiming “fraudulent, deceptive and illegal business practices” by allegedly permitting real estate appraisers to be influenced to increase real estate property values in order to inflate home prices.

Dave Biggers, Chairman of appraisal software giant, a la mode, inc., explains the HVCC originated when New York Attorney General Cuomo filed suit against the lender, Washington Mutual and the appraisal management company, eAppraiseIT. The lawsuit eventually escalated into an investigation of Fannie and Freddie directly.

According to Biggers, in order to stop the investigation into their practices, the GSE signed a settlement agreement with Attorney General Cuomo, agreeing to create new rules which would be embodied in the HVCC. At the last minute, the Office of Federal Housing Enterprise Oversight joined in and signed the settlement, which granted it federal rule status.  The HVCC became status quo for real estate appraisers and lenders.

The primary aim of the HVCC was a good one—to safeguard consumers against inflated home appraisals. A secondary goal was to insulate appraisers from pressure to hit a predetermined number by eliminating the relationships between mortgage brokers or real estate agents and appraisers. In order to achieve that goal, a third party middleman was introduced—a strong-arm “appraisal management company” (AMC) that demanded all appraisers conducting business with Fannie or Freddie hand over their client lists—and take a cut in pay.

While attempting to eliminate unethical practices, the HVCC caused a virtual maelstrom in the real estate industry.  In response to the implementation of the HVCC, one expert veteran appraiser states, “All of the experienced appraisers I know left the profession when they were told they had to surrender their client base of 20 years. Rather than take a 50% pay cut, intelligent appraisers have chosen to leave the profession to the newly licensed appraisers.”

Even if the HVCC were repealed tomorrow, the damage has been done.  Appraisers with 20 or more years of experience will never reenter the business. Once again the borrower will pay the price. “First the borrower is forced to pay 50% more for appraisals. Now they are guaranteed the worst quality appraisals on earth.”

Another New York 45-year old appraiser was so enraged by the HVCC he was arrested last December for threatening to kill Attorney General Cuomo.  His initial bond was set at $500 million.

Illogically, the HVCC mandates run counter to the absolute necessity of appraisers to interact with real estate agents. Appraisers must rely on agents and brokers for accurate verification of the very data they use to complete their appraisal reports.  The HVCC’s “do not touch” hands-off status of the newly “independent” appraiser virtually ensured failure.  One appraiser recently told a Chicago real estate broker, “You can’t talk to me. Do not call me.”

Many educated, well-counseled and motivated buyers and sellers have suddenly found their long awaited appraisal now comes in low—often much lower than the negotiated sales price.

Frequently, healthy owner-occupied homes with full warranties are compared—“comped”—to stripped naked, vacant and abandoned “as is” foreclosures or other distressed sales. Frustrated consumers have little recourse when the loan is denied.

Hope for relief from the HVCC debacle is on the horizon. On July 21, 2010, President Barack Obama signed the Dodd-Frank Act. The purpose of the new legislation is to reform the financial markets. Under the Dodd-Frank Act, the HVCC is officially set for elimination in 90 days. In its stead a new set of “appraisal independence standards” will be created by The Federal Housing Finance Agency.

The standards are expected to be written before September 30, 2010.  The good news is nothing in the standards will prohibit a person with an interest in the transaction from asking the appraiser to consider additional information, provide further detail or correct errors in the appraisal.  The bad news is the outcome is uncertain.

Part Two of this article will feature a step-by-step approach on how to get relief from a low appraisal.

A veteran real estate broker and appraiser, published author and national speaker on real estate issues, Sara Benson, CRB, ABR, is president of Benson Stanley Realty in Chicago. Email: Telephone: 312-337-4600

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One Response

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  1. Jim Kolke said, on August 10, 2010 at 12:18 pm


    Great article! This answers questions of falling values that not only are originated by buyers who low ball but now my appraisers with minimal experience if any. This is another attempt of the government trying to institute a “one size fits all” program for the real estate industry. I hope that when September 1st comes around that they do allow the buyers the right to question the appraisal process. Another program by the government? Why have licensing, bonding, E & O insurance in the Real Estate market then? I know that there are issues in the real estate market but adding another cook to the kitchen doesnt make it a better meal.

    Jim Kolke

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