photo credit:Steven Depolo
Contributing to Loan Rejections
After the housing crash, Andrew Cuomo, the New York attorney general at the time, looked to resolve the conflict of interest between mortgage brokers and real estate appraisers. Before the crash, mortgage brokers were allowed to select the real estate appraiser required for loan approval. Appraisers had an incentive to provide inflated valuations because mortgage brokers get paid more with writing the bigger loan. These approved mortgages were eventually sold to Fannie Mae and Freddie Mac. During this time, real estate appraisers were more like deal-enablers instead of valuation experts and this was a major component in the mortgage-lending quality slide which led to the crash.
Cuomo, Fannie and Freddie came to an agreement in 2008 to stop this and other appraisal-related practices that contributed to the housing crash. The agreement was called the Home Valuation Code of Conduct (HVCC), a controversial mandate that led to an increase in demand for appraisal management companies (AMCs). This became effective in late spring of 2009 and although it was replaced the following year by the Dodd-Frank Act, the rules survived and were embedded into government policy.
We are now seeing the opposite in the real estate appraisal world—low valuations. This doesn’t necessarily mean that the property in question is low quality, but it could still be a concern from a quality valuation standpoint.
An August 2014 Federal Reserve Bank of Philadelphia working paper acknowledged the impact of the HVCC rules on appraisal and mortgage outcomes. This paper is considered the first analytic proof of the HVCC’s effect since it was enacted. The frequency of low-value appraisals, those in which the appraised value was lower than the contract price, was looked at in the paper. The study shows that the biggest percentage of low-value appraisals occurred around the time when the HVCC was enacted. This was during the peak of the housing-market collapse; mortgage brokers and banks didn’t have to pressure appraisers as much to stay within the mandated valuation parameters. Appraisal report quality was not analyzed, but the paper suggests that it may have declined.
While the study indicates that inflated appraisals are less common today, the impact of low-value appraisals may be a problem because the resulting higher number of loan rejections slow down housing-market momentum. The rules may have also influenced appraisers’ slow response to housing-price trends—even with recent housing price increases.
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