Some people in the real estate industry in Arkansas say the Home Valuation Code of Conduct (HVCC) is a classic example of a solution being worse than the problem it is supposed to correct.

The HVCC is an agreement between Fannie Mae, Freddie Mac and the New York Attorney General’s office that was developed because of concerns that appraisers were under too much pressure from lenders, Realtors® and other entities to inflate the value of homes. Although the agreement involves activities in New York, it is being applied nationwide to all mortgages handled by Fannie Mae and Freddie Mac.

Jim Martin, executive director of the Arkansas Appraiser Licensing & Certification Board, said a lot of the problems with the HVCC center around the proliferation of appraisal management companies. Under the terms of the HVCC, lenders and anyone else who is compensated on a commission basis upon the completion of the loan are forbidden from selecting or communicating with the appraiser assigned  with coming up with the value of the property at issue.

Martin said these terms were an attempt to make sure appraisers aren’t influenced by people who have a vested interest in the completion of a mortgage loan. In reality, however, the HVCC ends up adding another set of fees to the closing costs associated with a loan.

“It’s costing the consumer more money under than this system than it would have otherwise,” Martin said. “Now, they’re putting another layer of fees on top of what they can charge to get the appraiser to do the work.”

Jeanie Buice is the president of Moore Mortgage in Little Rock, which is a wholly owned subsidiary of Delta Bank and Trust. She said one major problem with the HVCC is that it takes control of the appraisal process away from lenders completely.

“You’re lending the money, but you’ve handed over control of the mechanics of having the property appraised by other people,” she said.

The problem is that a lot of lenders wind up turning over appraisals to national companies that may or may not be familiar with market conditions in the areas where they are assigned to work.

She said the HVCC is an example of too much regulation – the code was created “because a few people who did some bad things are making it difficult for those of us who have been in it for 40 years.”

Buice pointed out the code was created as a response to some improper activities of lenders in New York and that many of those practices were rare in Arkansas.

“I don’t think the problem in Arkansas has been as big as it has been in other states,” she said, adding that the Arkansas Appraiser Licensing & Certification Board has been aware of some questionable practices and has worked to stop them.

Little Rock Appraiser Jay Hall said he started his career in 1974 and has rarely had to deal with pressure from mortgage bankers or Realtors® to inflate the appraised value of homes.

“I’ve had a couple, but in 35 years, that’s a ‘no problem’ in my book,” he said.

In fact, Hall said he sees problems because the HVCC forbids him from visiting with bankers and Realtors® about a property he is appraising. Talking to people close to and familiar with a property is part of coming up with true value of a property.

Hall said he is also concerned about both the potential increased cost of an appraisal and how the fee will appear on the closing statement. If, for example, an appraisal management company charges $500 then hires an appraiser for $300, the closing statement will show that appraiser is getting the full $500.

Hall said he is also concerned about the way some appraisal management companies fill their rosters. Often, he said, appraisers are chosen who will do the work for the lowest fee.

“Often, we’re talking about the least trained appraisers,” Hall said, adding they may not be familiar with the areas to which they are assigned. If an appraiser from Little Rock is assigned to handle a job in Fayetteville or Hot Springs, how can that individual be expected to know those markets?

Another concern, he said, has to do with pressure from banks to inflate appraised values – the very thing the HVCC was designed to eliminate. Most appraisal management companies, he said, are owned by large, national banks and Hall said he is worried they will be used to create an income stream.

When appraisals are used as a consistent income stream, Hall said there is a danger there will be pressure to inflate appraisals to help secure that revenue.

To make matters worse, Hall said appraisers are generally treated as employees by appraisal management companies, meaning they are given a lot of work to do and little time in which to complete it. If there’s not enough time dedicated to an appraisal, then there’s a good chance it will not reflect the accurate market value of the property.

Hall said buyers and sellers worried about an appraiser running up against a short deadline should ask banks and their Realtors® to insist on ordering an appraisal well in advance of the closing date.

In response to the complaints about the HVCC, U.S. Reps. Travis Children (D-Mass) and Gary Miller (R-Calif.) have introduced a bill that would put a moratorium on it. According to a June 30 article in American Banker, the legislation directs the Federal Housing Finance Authority – the conservator for Fannie Mae and Freddie Mac – to suspend the HVCC for 18 months.

Update: The Federal Housing Finance Agency has directed Fannie Mae and Freddie Mac to clarify some provisions of the HVCC regarding matters such as geographic competency, what communications with appraisers are allowed, etc. Stay tuned!