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New Rules Could Mean Appraisal Headaches For Local FHA Loans Come January
September 20th, 2009 categories: Buying, Loans / Financing, Selling
UPDATE: Dec. 27, 2009 — FHA has announced that it is delaying implementation of its new appraisal policy until Feb. 15, 2010. It was originally slated to go into effect 1-1-2010, as this post indicates. For more details, click here.
If you’ve been reading this blog or following the local real estate scene in recent months, you’ve no doubt heard a lot about the Home Valuation Code of Conduct (HVCC), a policy that was adopted back in May which has created all sorts of havoc for many sales involving a conventional loan.
So far, many FHA borrowers have been spared the frustration that has ensued since the HVCC went into effect. But come Jan. 1, that could change, thanks to HUD’s upcoming appraisal requirements, which were just announced on Friday.
While HUD didn’t adopt the Fannie Mae/Freddie Mac HVCC policy verbatim, it did adopt many of the same rules and requirements.
For those who don’t know what the HVCC is all about, here’ s a quick overview.
The System Cried Out For Change
Up until this past May, your loan officer would assign their favorite appraiser to evaluate the value of the property for the lender. So in theory, the appraiser’s future workload with that loan officer hinged on his/her ability to ‘make the numbers work’.
Obviously, the lender who was putting up the money relied heavily on the integrity of the local loan officer and the appraiser. Well, in the shadow of the subprime meltdown, audits revealed numerous instances where appraisers had come up with a value that was clearly far more than what the property’s real value had been at the time.
So the government put pressure on the lending industry and Freddie Mac and Fannie Mae adopted the HVCC last May. The premise was that the person originating the loan (the commissioned loan officer), who stood to make money only if the loan went through, should have no part in selecting the appraiser nor any opportunity to influence the outcome of that appraisal.
Let The Appraiser Call It As He Sees It
In theory, the plan made a lot of sense. An appraiser should have the ability to ‘call it as he or she sees it’ and not feel pressured to hit a certain number or fear losing future business from that lender.
However, in practice, the HVCC has become a huge nightmare for many buyers and sellers.
That’s because most large lenders have turned to third-party appraisal management companies (AMCs) as a way of ensuring that their appraisals are prepared at arms length.
An Appraisal’s Only As Good As The Appraiser Himself
The lender contacts the AMC who then contracts with a local appraiser. However the term “local,” has become a loose term with many of these AMCs. For, instead of sending out an appraiser who knows the local market inside and out, they’re often sending out inexperienced appraisers from far outside that market area, who have little or no knowledge of the local market beyond what they can glean from looking at MLS statistics.
Since the HVCC was adopted, there have been all sorts of instances of botched appraisals due primarily to the appraiser’s inexperience and lack of familiarity with the local market.
Some of that has been due to the AMCs raising the cost of the appraisal and then keeping a large portion of that fee, while reducing the actual appraiser’s earnings.
As a result, many of the most experienced field appraisers have refused to work for what in many cases represents almost a 50% pay-cut. And that, in turn, has caused the AMCs to hire inexperienced appraisers who are willing to work for less.
Shouldn’t An Appraiser Know The Area?
We’ve seen many instances where appraisers from 60-90 miles away, with no previous appraisal experience in the city where the property is located, have been assigned appraisals on Bay Area properties.
However, whereas in year’s past, you could order a second appraisal if the first one didn’t really seem on target, under the HVCC, you really have to be able to demonstrate that first appraiser clearly didn’t know what he or she was doing.
In other words, a lot of red tape, with no assurance that the lender will ultimately allow a new appraisal — particularly since that first appraiser will no doubt try to figure a way to justify his or her position.
Even though the HVCC in theory was a very good thing, the policy essentially moved the pendulum from far-too-lenient all the way over to far-too-restrictive.
As a result, there has been a huge cry and plea to legislators to put the HVCC on hold temporarily so that they can work out the kinks and come up with a policy that will allow the lender to get a reliable, accurate estimate of the property’s true current value.
FHA’s New Policy Starting January 1st
And that brings us to yesterday’s announcement by HUD, which will affect all FHA loans that are originated starting Jan. 1, 2010.
Under the new FHA policy, lenders who get a commission when the loan funds are prohibited from ordering the appraisal — just the same as currently exists under the HVCC.
But HUD has incorporated several nuances into the new FHA policy which it hopes will prevent it from creating the same headaches that have come about with the HVCC.
- For one, if lenders turn to an appraisal management company, as is now the case with most conventional loans, FHA has adopted a few rules that are designed to prevent the AMC from keeping a large percentage of the appraisal fee.
- Secondly, in the actual appraisal itself, appraisers must certify that they have local knowledge and appraisal experience in the property’s market area, as well as access to the necessary data sources for that area.
So it appears that FHA has tried to eliminate some of the snafus that have developed since lenders started farming out all of their appraisal work on conventional loans to these AMCs.
Most First-Time Buyers Will Be Affected
Most first-time buyers today are using FHA loans. And since lenders are currently still allowed to send out their preferred appraisers, the problems that have engulfed many conventional loan transactions haven’t been as wide-spread on FHA loans.
Some large lenders, though, have already turned to AMCs for their FHA loans. And while the new HUD policy doesn’t specifically require the use of an AMC, it does require safeguards to ensure that no one on the “loan production” staff has an influence or involvement with the appraisal process.
Will FHA’s Safeguards Be Enough?
Whether the safeguards HUD has incorporated are far-reaching enough to prevent unforeseen appraisal headaches on FHA loans after the first of the year remains to be seen.
So if you’re planning to use an FHA loan and your lender has assured you that he or she can still send out their favorite appraiser, just be aware that come Jan. 1, that’s all going to change.
Stay tuned for more details in the coming months. To read the full text of HUD’s new policy, click here (select document numbers 09-28 to 09-32).
FURTHER READING
- Are Home Prices Finally Heading North?
- Are Short Sales Really Selling In Solano County?
- First-Time Home Buyer Tax Credit Almost Gone?
- Are We In An Artificial Boom Market?
MARKET UPDATES
- Monthly Solano Real Estate Report – Aug ‘09
- Benicia & Vallejo Home Sales Report — Aug ‘09
- Monthly Solano Real Estate Report – July ‘09
- Vallejo Home Sales — July ‘09
- Benicia Homes Sales — July ‘09
- 2nd Qtr Solano County Home Sale Statistics
- See The Latest Market Update
