HVCC: Who Is The Least Interested?

by Justin McHood on September 2, 2009 · Comments

in Mortgage / Finance

The one with the least interest controls the relationship.

In any negotiation, I have found that remembering this simple rule helps me not only remember which side of the motivational fence I am sitting on during the negotiation, but also to understand the other parties actions.

There is a show playing all across the valley right now and it is produced in large part by the new HVCC (Home Valuation Code of Conduct) rules. Depending on your perspective, it could be classified as a horror, drama, comedy, suspense, thriller or documentary. But no matter what genre you put it in, one thing is certain…

The appraisal management companies have the least interest and they are in control.

While the above may sound like a good idea from the outside looking in, consider a couple of my random thoughts on Twitter this week as I was watching the show:

hvcc makes my head hurt

One of the best things that I can say about the new HVCC laws is that it has taken me the loan officer out of the line of fire. Trust me, when an appraisal doesn’t come in at the sales contract price, people start asking questions. People whose livelihood is on the line.

What is the definition of a “market”? I always thought it was when you had a seller who is willing to sell something at a given price and a buyer who is willing to buy something at said price. That might be true for most things, but in today’s Real Estate world, you get to make sure that an appraiser “feels” like the seller should sell at that price and buyer should buy at that price.

HVCC is the HIV of Real Estate

So before HVCC when an appraisal would come in lower than contract price (I can’t tell you how rare this was), I became the punching bag guy who was supposed to “fix” it.

Now that we have HVCC, when an appraisal comes in low for <insert reason>, I have multiple people calling me asking me what I think they should do… because they know that as a loan officer, I really can’t even talk to the appraiser anymore.

So I offer up my best advice,  give them a pep talk and send them into the ring to negotiate/justify/fight for what they think is a fair market value.

And more often than not, they generally get bludgeoned by an appraiser – or even worse, some kind of “appeals committee” at the appraisal management company who doesn’t really care.

But if you stop and think about the appraisers perspective for a moment, any  logical business person would tell you that they really have no incentive to care.

Heck, if you put yourself in a typical appraiser’s shoes, as a result of HVCC:

  1. Their income has been significantly reduced as a result of the appraisal management company agreements (note: this does not mean it is cheaper for the consumer – just the opposite)
  2. Many of their clients can’t talk to them anymore
  3. Now rather than having multiple clients, there really is only one decision maker (the appraisal management company) who decides who gets what work.
  4. Great work will not necessarily result in more work.

Can you really blame them? HVCC handed almost every appraiser in America a pay cut and a boss. A boss that doesn’t make any sense and has his hand in their pocket.

And unfortunately for us all – there is only one group of people who currently are less interested than appraisers…

The people who made the HVCC laws.


McHoodAbout the Author: Justin McHood is a mortgage broker with VanDyk Mortgage Corporation. You can find him at Arizona Mortgage Team, on the Zillow’s Mortgages Unzipped Blog, and at most East Valley Friday Nights gatherings. He’s the one in the blue shirt.


 

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  • datadude
    There is finally some more truthful appraisals coming into the Real Estate Market and you are complaining? Figures, this is coming from someone also making less money from the more truthful appraisal. Maybe you should find more gullible cash buyers.
  • "datadude" - Not that Justin needs me to defend him, but I feel compelled to chime in...
    "Truthful appraisals"?? Really? How is an appraisal "truthful" when an appraisal management company sends out an appraiser who is completely unfamiliar with an area to do the appraisal? I've seen appraisals come in tens of thousands of dollars low (and yes, even come in HIGH) despite the fact that good comparables are available. An appraiser needs to understand local market nuances in order to make proper adjustments. Now with HVCC, many can't. Doesn't mean they are bad appraisers, they just don't have the local knowledge to provide a "truthful" appraisal.

    I'm curious as to how many home appraisal's you've dealt with in the last 3 or 4 months that gives you insight into just how "truthful" they are?
  • @datadude,

    I remember back before HVCC when loan officers got to select the appraiser for a particular transaction. When I first got to the valley, I set out to find a "good" appraiser to work with.

    The first appraiser I interviewed, I sat down and put a sales contract in front of him for a $100,000 house in Apache Junction. I also gave him an appraisal from a different appraiser that said the property was worth $100,000.

    I asked him to look at the contract and appraisal and let me know what he thought the value was. He carefully looked at the contract for a few seconds, then opened the appraisal and studied each page for a few minutes.

    After about 10 minutes, he declared "I think that the appraisal is wrong. It is low. I think that this property is actually worth $110,000."

    The second appraiser I interviewed, I did the same thing. Told him that I had a sales contract and an appraisal and wanted his opinion of value. The 2nd appraiser barely looked at the sales contract, but studied the entire appraisal for about 30 minutes and then declared: " I think that this appraisal is wrong. I think that this property is worth $90,000."

    The third appraiser I interviewed, same story. I gave him a sales contract and an appraisal on the property and asked him what his opinion of value was.

    He didn't even look at either the appraisal or the sales contract. But he did get up, close the blinds and then shut the door to my office. He sat back down in his chair, leaned forward, looked me square in the eye and whispered...

    "What do the buyer and seller think it is worth?"

    It was then that I learned:

    Every appraiser has an opinion of value - and many of them are different. Sometimes widely different. And each one has different methodology as to how they arrived at their "opinion" even though they generally have the same "rules" to follow.

    Anyway, thanks for taking the time to comment - I have no idea what you do for a living, but if you work in the RE field in some way, you are the lone voice that I have heard about HVCC providing more "truthful" appraisals.

    But hey - speak up and be heard! Someone needs to congratulate the smart guys who put HVCC in place if they feel that way. Heck, all the rest of us tell them how insane it is - and they might even be getting tired of us by now.
  • datadude
    Right so you found someone who would agree with you on most cases and would tell you what you want to hear. The lenders did the same thing, What did that lead to? It kept pushing prices to "values" that were overly inflated.

    Appraisers chosen by certain people and work with them a lot, those persons become a biased party. Same thing if an appraiser works within a specific area. What, do they live in the area and have a vested interest in how that area does as far as home values?

    An impartial appraiser is probably going to give the most truthful appraisal.

    Now the lender has a different outlook (or should) and that is to protect their investment and not get stuck with a bloated loan on a property that isn't worth the "contract" price to someone else. They do not want to get stuck with the losses that they are taking now. There is a lot of emotion in that "contract" price from both the seller and the buyer, the Investor has to take that emotion out it is a business decision for them not a personal decision. Just read a couple of the posts below you can hear these emotions coming out from what I suspect are sellers.

    Like I said before, you better go find some gullible cash buyers where you can keep that emotion in the deal.


    I do agree that it is all an opinion (but they can be jaded) but aren't most things.
  • Mortgage Industry Pro
    Justin,

    Good post. You make a lot of valid points. Most important is the one that you start with: the appraisal management companies don’t have a financial stake in the transaction, and that’s a good thing. In fact, the same could – and should – be said for appraisers in general.

    The emotional aspect that datadude mentions is a very influential component in any real estate transaction, one that in no small part led to artificially inflated prices bringing the bubble to the point of bursting.

    One thing that troubles me about this whole controversy is the way in which all AMCs are being painted with the same broad brush.

    There are quite a few large and reputable AMCs that have been in the business for decades and whose business model and assignment criteria haven’t changed one iota since HVCC. They only use certified and/or licensed appraisers and use geographical competency as the primary assignment criteria.

    I know several appraisers who work for these companies, and they’re extremely capable, knowledgeable folks who work hard in markets they’re intimately familiar with. Their pay scale hasn’t changed post-HVCC, nor has their commitment to USPAP, nor their professionalism.

    Of course, HVCC has created a financial opportunity and incentive for a lot of new AMCs to enter the business, and some of these may indeed be randomly selecting appraisers from a pool and assigning them without enough consideration as to their experience level or geographical competency.

    The real lesson here is that lenders shouldn’t be shopping out appraisals to fly-by-night operations, but should instead be steering that important work out to AMCs that have proven themselves reliable over many years.

    Like the blog. Keep up the good work.
  • @Mortgage Industry Pro,

    Excellent points and insight. Thanks for sharing with everyone.

    Justin
  • ralphdbredahl
    Just had an appraisal done by an appraiser that drove form his area in Sun City to apply his expertise to my property in Queen Creek. Took him 2 hours to find the place once he got to Queen Creek. Pretty scary
  • Ralph,

    What, you mean that there is a difference in market between QC and Sun City?

    Haha.

    Yeah, I have seen that same thing happen.

    Thanks for taking the time to comment!

    Justin
  • Great post! I have heard nothing but complaints about that change. It just makes everything a little bit more complicated. I know that it had good thoughts behind it, and it was trying to solve a problem. Management failure.

    -Tyler
  • Tyler,

    Thanks for taking the time to comment. I agree that it makes everything a bit more complicated -- but the thing that is worse is the randomness of it all. I find that the randomness is what drives people more crazy.

    Great point about the people putting it in place probably had good intentions -- I don't disagree with that. I think much of what we see can be attributed to the "law of unintended consequences".

    Justin
  • brandongreen
    Good analysis Justin!
  • ashlee07
    Great article and interesting read. Great job.
  • Makes me glad HUD rejected the HVCC for FHA loans....
  • I met with some clients on Sunday afternoon to help get their home ready for the market. He's in his 70's and she's early 60's, and both avid talk-radio groupies.

    They had one question, "Have you heard about this appraisal mess, like we heard them discussing on WMAL radio?"

    I had to assure them that appraisals are nothing new for buyers getting financing and that we needed to price it within the recent comps in the neighborhood (now about $550k and they paid $125k). But I did mention my recent experiences (one was $10k low) and that we will have to cross that bridge when we negotiate any offers and prepare for the appraiser's visit.

    I'm not a complainer, but when an appraiser does not adjust for obvious upgrades because they were doing too many appriasals too fast, and they are scared s-less to take an easily verfiable list of improvements with dates because it may give "an appearance of influence", then the consumer isn't being served.
  • Doug,

    Thanks for sharing - I think you bring up a good point about appraisers being "scared" for whatever reason. Replace that word with "overly-cautious" if you want, it is splitting hairs.

    Great point!

    Justin
  • You're right, this is a crazy situation. In some cases it seems clearly unfair, and surely if the buyer and seller both agree on a price and are ready to go there should be no one in between them to prevent them from doing so.
  • Appraisal management companies in my area are a big problem. Most of these people don't anything about real estate or appraisal(although there are exceptions) and are taking money and creating obstacles for appraisers who treat their job with dignity and professionalism. There comes a time when you have to trust the professional. Appraisers didn't create the real estate market to failure. Heck, I considered opening an appraisal management company since there was no licensing, no education, and no responsibility. Maybe lending institutions should be more aware on what they are lending money on before they pass the buck.
    Hopefully there will be some adjustments to solve this problem.
  • claudiajordan
    Recently I had a sale fall out due to an appraisal coming in $25k low. In addition to the house, there was a casita (625 square feet with a full kitchen built in 2000) and the appraiser gave it $0 value because he couldn't find a "casita" comp. Needless to say, the buyer cancelled his $445k offer. The seller wouldn't do a short sale so is letting it go to foreclosure. Wow, that really helps the neighborhood values.
    I live and work in the county NE of Scottsdale city limits. Rio Verde Foothills has over 1000 homes that are custom and semi-custom and predominatly horse properties, every single one different. We're dealing with appraisers who don't know the value of wells, barns, paved roads, mountain views, etc, etc. Whenever possible, I meet the appraiser at the house to answer questions.
  • "The seller wouldn't do a short sale so is letting it go to foreclosure" WOW, sounds like the most stubborn seller ever!

    I've had a few appraisals re-introduce the negotiation process once the appraisal came back low... but what do you expect? it's real estate, Seems like every month I get surprised with new formalities
  • Trang,

    "...Seems like every month, I get surprised with new formalities."

    Well said.

    In my experience, in real estate over the last 18 months - only one thing is constant: change.

    Justin
  • There was too much 'talking' going on between loan officers and the appraisers that were supposed to be unbiased. Abuse happened. HVCC is a reaction to that abuse. Is it an over-reaction? Possibly, but it's going to have to play out for awhile before we can determine that for sure and adjust. Just like the banks over-reacted with ridiculous restrictions on lending good people money because they had dug themselves into a hole with too lenient lending practices, the appraisal restrictions are in place to address the obvious. I am not convinced HVCC is all that bad yet, might need some fine tuning - but I like the idea. (FYI - yes I have been on the wrong end of an appraisal that came in 16k under what the buyer and seller had agreed was a fair price. We worked around it - still like the idea) Thanks for the dialogue!
  • Yes, the HVCC has good intentions but put yourself in the appraisers shoes. For example, what if the same scenario happened with real estate agents. What if you had to kick out 1/3 or 1/4 of every one of your commission checks to a "management company" to evaluate your contract and tell you that you need to supply more information. Appraisers don't make much money considering their scope of work. Sure, it is an opinion of value, but it has to based on some factual information. Maybe the appraiser, banker, agent, and/or closing attorney pitch in to pay the mediator? The entire system was screwed up. Appraisers shouldn't be responsible. I still say responsibility should fall upon the lender, it's their money they are lending....or is it?
  • Tiffany,

    Thanks for stopping by!

    One of the frustrating things is that there is no feedback loop for what is working and what is not working regarding the HVCC rules. As with most things, there are some good things about it (I really like the fact that people can't expect me to get an appraiser on the phone and "fix" an appraisal that comes in low) and some bad.

    But there isn't a process of continual improvement to evaluate what is working and magnify it while throwing out the part that isn't working.

    But it should be interesting to watch over the next year how it all plays out. If nothing else, it will be entertaining reality TV.

    Justin
  • This new appraisal rule has really caused us allot of issue her in Tracy Ca, Homes are being over bidded due to the supply and demand issue we are having. The appraisers are not giving us the values even when they are there.
  • Tracy,

    It sounds like you are seeing first hand some of the same problems we are here in AZ. As soon as some of the super-thinkers down here come up with a solution that we can get some legislator to sign off on, we will be sure to let you know.

    Justin
  • In the Baltimore Real Estate market, the HVCC is the worst thing to happon to the industry since the advent of exotic mortgages. The "division of parties" between the lender, real estate agent, and appraiser has limited the successful execution of several deal in the Baltimore city and County. The main reason is that we have appraisers comming into our area from Virginia or individuals who have no clue about the area.
  • Hello E-A-S-T Coast!

    It amazes me that appraisal management companies think it is a good idea to "import" an appraiser from a different area.

    I suspect that it is an issue of lazyness on the part of the AMC -- they are probably just picking someone who is the easiest to contact rather than do their research and get someone who is familiar with the area.

    Just a guess -- but the "importing of appraisers" is a problem -- and it sounds like it is a bi-coastal problem... not just out west.

    Thanks for stopping by and commenting!

    Justin
  • gregdallaire
    Justin,

    I'm new a reader and subscriber to your blog. I really feel like you hit the nail on the head when explaining some of the true problems with the HVCC program.

    When someone is forced to have a 3rd party company control everything and have their wages and business impacted immediately you can tell that there will be a significant decrease in quality of appraisals.

    The appraiser's i've had relationships with for a long period of time are planning on getting out of the business if they already hadn't. It's not because they weren't doing there job's it because they have no control over getting business other than submitting themselves as a slave to some random computer system.
  • Greg,

    Thanks for the comment!

    The third paragraph about many appraisers you know are planning to get out of the business -- I can tell you that I also see that as well. HVCC gave all of the appraisers in America a "boss" and a big part of the reason they were appraisers in the first place is that they liked the idea of being their own boss.

    And don't forget that the "new boss" doesn't really make any sense. The first thing the new boss did was to reduce everyone's pay. Then he took away their ability to talk to most of their customers. Then he changed the rules so they really can't go solicit new business except through him. And lastly, he decided that even if they do a great job and customers love their work, they won't promise them more work unless the "boss is in the mood" to give them more.

    No wonder they are leaving the business!
  • A_Morris
    Good article. The HVCC seems to be just feeding the big banks that own stakes in the AMCs at the expense of a lot of good appraisers.

    Our house mysteriously dropped $34,000 right after the HVCC was handed down in May. The two appraisals were required to purchase were only a few weeks apart - $10,000/week in price drop? I find that hard to believe.

    We couldn't believe that it blew out our deal and that the 'review' appraiser was from Phoenix and compared our house to foreclosed disasters in bad neighborhoods with only minimal adjustments for condition. Knowledge of the area - no way. I really hope that HR3044 gets passed soon. Cuomo screwed the pooch on this one.
    http://oursazlife.blogspot.com/2009/05/its-valu...
  • jamila1
    I think that many appraisers predict that the profession cannot continue to attract competent professionals, capable of producing reliable reports, given the relentless pressure for lower fees and faster turn times from appraiser management companies (AMCs): the most competent and talented will migrate to professions that are more profitable and satisfying, goes the prediction.
  • appraiserusa
    Thanks for giving the public a small bit of insight into the raw deal that appraisers were handed with HVCC on May 1st. For more information on the topic of HVCC and how it is also raping the American homeowner visit www.investsmart.com
  • Justin, this is an outstanding post with a great perspective of the "downfalls" of HVCC. You hit this one out of the park.
  • Thanks.

    Your check its in the mail for saying such great things!

    Justin
  • mk_109
    The problem is that if HVCC keeps going too long, too many of these AMC companies will feel "entitled" to their position in the industry. They are taking money from appraisers and from borrowers and doing what exactly? A professional appraiser has to give up over 1/4-1/2 of his pay while he is still doing all of the work and then some extra. Its a ridiculous scam to make a middleman and the banks more rich at the expense of the appraiser and the borrower. Should there be rules to help against mortgage fraud? Of course! But this is not it. Anyway, if the AMC companies and banks are going to feel the profits of HVCC for too long, they will not go out without a fight (political lobbying , etc) and remain leaches to the profit from the work of others. Does anyone know what the time frame of HR 3044 is of going through congress, and what exactly will happen if its passed? (..by the way I am a CA mortgage and real estate broker. My mother has had her own independent appraiser business for over 10 years and has always performed with integrity and quality in the industry, and has to settle for huge commission cuts and more work requirements from her AMC companies that she uses. I just passed the appraiser trainee license and had planned on going into the appraisal business with her). Imagine if you had a professional business you invested your life into and were making 60k-100k per year and suddenly someone came in and mandated your pay be cut to 35k- 60k per year and you had less decision making power, and more work to do for less money- and keep in mind this is work which is so important to the whole industry and economy.
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