By Diana Hill, Online Trading Academy Real Estate Investor Instructor
A new set of rules went into effect May 1, 2009 for appraisals of residential real estate (1-4 units). The new Home Valuation Code of Conduct (HVCC) dictates certain practices lenders must follow if they intend to sell the loans to Fannie Mae or Freddie Mac. The HVCC worked out an agreement between Fannie, Freddie, and the New York Attorney General's office; this was in response to an investigation. The purpose of the HVCC is to insulate the appraisal process from undue influence by placing tight controls and restrictions on the ordering of an appraiser, as well as guidelines for communicating with the appraiser during the process.
It's important for us to understand, as real estate investors as well as consumers, how the new Home Valuation Code of Conduct can affect appraisals on properties.
Here are some of the facts and myths you should be aware of.
Fact: The code requires lenders to order appraisals themselves, rather than accept any completed by an appraiser who was chosen, hired, or paid by a mortgage broker, real estate agent, or other third party.
Fact: The code requires lenders to ensure the borrowers are provided a copy of the appraisal report no less than three business days prior to closing, unless the borrower waives the requirement.
Fact: The code requires absolute independence within a lender's organization between the appraisal function and loan production and limits communication with the appraiser.
Fact: The code allows an appraisal to be transferred from one lender to another, but only if the original lender gives written assurance that the appraisal is HVCC compliant and the new lender accepts that assurance.
Myth: Real estate brokers and agents are prohibited from communicating with appraisers even if they have no direct interest in a specific sale.
Reality: Real estate agents and brokers provide information to an appraiser that is invaluable to the appraiser in the development of an accurate and reliable opinion of value. This includes information related to closed and pending sales, terms and conditions of the sale, etc. Without this information, an appraiser has a much more difficult time developing an accurate and reliable opinion of value. Agents and brokers, including those that have a direct interest in a transaction, are permitted to communicate with an appraiser and to provide additional information to an appraiser as long as communication and information is done in a way that is not intended to influence the outcome of the appraisal.
Myth: The code prohibits appraisers from reviewing "reconsideration of value" requests.
Reality: Reconsideration of value requests that are based on correcting objective, factual errors (such as incorrect square footage, incorrect number of rooms, etc.) are permissible under the code.
Myth: The code prohibits the use of foreclosures as comparable sales.
Reality: The code does not address the use of foreclosures as comparable sales. If the appraiser determines that a foreclosure is representative of the properties available to typical purchasers for the market in which the property is located, appraisers must consider them.
I understand the need for guidelines after the free-for-all we've had in the industry. However, this code of conduct can make it more difficult to complete transactions. Three of the most significant effects are an increase in the cost of appraisals, delay in completion of appraisals, and appraisers who are assigned to value properties that may be as far away as 40 miles.
The HVCC makes it much more difficult for real estate professionals who have relied on relationships they have already built to make sure that their clients get an affordable and timely closing.
As one last note, the HVCC does not apply to FHA or VA loans, and some smaller banks are exempt from some of these requirements.
If there are topics on real estate and real estate investing that you'd like more information on, please feel free to email me and I'll put those into my future newsletters. I look forward to meeting many of you this coming year as the Professional Real Estate Investor class comes to your center.
Great Fortune,
- Diana Hill dhill@tradingacademy.com
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