Those are just some examples of how the new Home Valuation Code of Conduct, HVCC for short, has been cutting into builders' bottom lines at a time when there is little left down there.
“It really comes down to kicking somebody when they are already down,” says Gloria Andrews, first vice president of residential escrow and loans for California-based Warmington Homes.
The code, which went into effect May 1, was borne from an agreement between Fannie Mae, Freddie Mac, the Federal Housing Finance Agency (FHFA), and New York attorney general Andrew Cuomo. It forces lenders who want to sell their conforming loans to Fannie Mae and Freddie Mac to follow new rules designed to ensure greater appraiser independence and more honest home valuations.
However, home builders and other critics have complained that the code is overcorrecting for boom-time sins, turning home price inflation into deflation. Backlash from the new code has grown shrill enough to reach ears on Capitol Hill. On June 25, Reps. Gary G. Miller (R-Calif.) and Travis Childers (D-Miss.) introduced H.R. 3044, a bill that would place an 18-month moratorium on the new code.
“They [appraisers] just keep marking things down because they are afraid. That's what's happening,” says Tim Kane, president of California-based MBK Homes.
QUANTITY VS. QUALITY Some industry experts pin such value reductions on how the new code is set up. Bill Gerber, director of government and external relations for the Appraisal Institute, says the new code is creating “a race to the bottom in terms of fees.” Although the new rules drive up the cost of an appraisal to the consumer, it undercuts the cost to complete an appraisal. Consequently, many third-party appraisal management companies (AMCs) have dropped their prices hoping to gain volume; Gerber says many bids have come in at 50 percent of what would be considered market-rate fees. This rock-bottom pricing is forcing many companies to turn to underqualified and out-of-town appraisers to complete appraisal jobs, Gerber says.
“The AMCs are sending appraisers to areas they have no knowledge of,” wrote one independent California-based appraiser, who asked to remain anonymous, in an e-mail. “I am certified, experienced, and my reputation is spotless. I have glowing letters of recommendation. But here I sit with very little work since May 1, while the lesser qualified appraisers are busy. The AMCs are sending the cheapest and quickest appraisers to our area from other areas. It is causing real problems.”
The proliferation of low-quality appraisals could have increasingly serious consequences for home builders. For every appraisal appeal, review, or request for second appraisal, a closing is delayed as many as three to five days, according to Gerber.
Moreover, a low-ball appraisal or a restricted cap on loan-to-value means either the builder has to concede on price or the home buyer has to ante up more cash at the closing table. And the latter is hardly happening.