As of yesterday, May 1^st, a new law is now in effect which will have an impact on anyone who is applying for a new mortgage loan. The change, the adoption of HVCC, the Home Value Code of Contact, affects property appraisals and how they are ordered and it is one of the new reforms designed to end the abuses that contributed to the run up in home prices which came before the real estate bust. The idea behind the law is that mortgage lenders were pressuring appraisers for higher values in order to make the deal (purchase or refinance) work, and that it was this pressure which drove property to unsustainable levels. The new system takes ordering the appraisal away from anyone with a vested interest in getting the loan done (loan officer, sales and support staff) and goes a step further so that the loan officer isn’t even allowed to communicate with the appraiser. No doubt there have been abuses in the system, but in ranking the causes of the crisis, this isn’t near the top of the list ( too much easy money from Wall Street was the biggest factor) and there have always been checks and balances in the system to keep this from happening (the difference is that they are now being enforced). This is a good example of a well meaning law which is likely to cause more problems than it will solve, but it will impact some much more than others, and for mortgage brokers it puts one more nail in their coffin.

I understand the logic behind this law. Lenders only get paid if a loan closes, so the appraiser, who relies on the lenders for business, may feel pressured to come in with higher values than they would other wise give or risk being cut off from their referral source. I know that this happens, especially in a market where prices are moving up. In a down drafting market like we are in now, the opposite is more likely. Every appraisal is getting intense scrutiny from the underwriters who make the final loan decision, and every appraisal we get is being marked up and sent back to the appraiser asking for more comps or clarifications on why they made the adjustments they did. Appraisers are coming in with conservative values because fear is the motivator now. They are getting beat up on each appraisal they do, so the inclination is to come in with a safe, low value. It is the end lender who makes the rules, and when the boom was on they wanted more volume so they had a bias toward rising prices, now the bias is toward the lowest values.

This law was passed a year ago, but with opposition from all the real estate industry groups it was an even bet whether it would actually go into effect. There aren’t any real winners with this new law. It will cause problems for everyone from the appraisers themselves to the consumers who are supposed to benefit from this new program. Here is what this will look like from different perspectives:

• Appraisers – For many appraisers, their income will be going down. Many loans will be placed through Appraisal Management Companies (AMCs) which will rotate the appraisal orders through their members, and take off a hefty fee for doing so. It also means that the good appraisers who have built their business through strong relationships, will be in the same boat as a newer appraisal who is willing to work for less.

• Consumers – This law was designed to help consumers, but it is likely that it will cost them more over time. One of the provisions of the new bill expressly prohibits doing value checks before an appraisal is ordered. One of the first things I do when I talk with a new borrow about a refinance, is check on the value. If it looks like the value is close on what we need, I will contact one of my appraisers and ask for a value check. This means they will run some comparable sales and do some preliminary work to see if the home looks like it will appraise out, or not. It doesn’t make any sense to charge a customer for an appraisal if we are not able to do the loan. We will have some alternatives that will allow us to do this, but these alternative will cost more, one way or the other. It is to early to know for sure, but without accountability, appraisals may take longer to get done, which means longer lock periods and higher rates.

• Mortgage bankers and correspondent lenders – Mortgage bankers and correspondent lenders, like the company I work for will mostly be inconvenienced. We will need to institute policies which will rotate the appraisers on our approved list and put all contact through an internal appraisal management department. We won’t have any contact with the appraiser, so when there are property issues we won’t have any control. For example, this week I had an FHA closing where some work needed to be done prior to closing. The work wasn’t finished until the day before the close, but I was able to call the appraiser and he rearranged his schedule in order to get the job done quickly so we could close the purchase in time. I doubt if this will happen as easily now without having big rush fees added.

• Mortgage brokers – This may be the biggest casualty of the new program, and if it means that more mortgage brokers are put out of business, this means less competition and higher prices to the consumer. Mortgage brokers will have to order the appraisal through the end lender and the appraisal will come in the lenders name. If for some reason the loan doesn’t go through with this lender (and this could be because they couldn’t get an approval, or maybe the rates have dropped and they can relock at a lower rate with a another lender) they will need to get a brand new appraisal. This will add a lot more time and more cost to the loan process.

Every one loses some control with this new program, but for mortgage brokers, who have been under pressure with all sorts of new rules aimed at them, this will be a big obstacle to over come. If you are shopping for a mortgage, either for a purchase or a refinance, one question you need to ask is what type of company are you dealing with and ask how the new appraisal rules will affect you if you move forward with a loan from that company.

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