Wednesday, August 19, 2009

Real Estate Appraisals and the Home Valuation Code of Conduct

Several weeks ago we cited an article (here) about title insurers; today's New York Times highlights the appraisal industry. The article, by David Streitfeld, is here.

As of May 1 of this year, almost all appraisals are now ordered by mortgage lenders -- as required by the Home Valuation Code of Conduct (you can link to Freddie Mac's summary of the Code of Conduct here) -- rather than by real estate agents, as used to be more typical.

Freddie and Fannie's adoption of the Home Valuation Code of Conduct is genearlly viewed as their response to allegations that appraisers were being unduly influenced by parties interested in obtaining the highest valuation possible -- rather than one that was necessarily accurate.

Now, however, there is a significant backlash against the requirements of the Code. Critics argue that it is giving appraisal "management companies" an ever-growing influence in the real estate market and driving the more experienced (and more expensive) appraisers out of the market:
"Real estate groups say the management companies, with the competition from brokers and agents eliminated, are now trying to fatten their profit margins by hiring appraisers as cheaply as possible. These inexperienced appraisers, often traveling many miles to a market they do not know well, are scuttling legitimate deals, the agents claim."
The criticism of the new appraisal structure is taking root -- Streitfeld reports that fifty five US Representatives and Senators have sponsored a bill calling for an 18-month moratorium on the Code; he does not, however, assess the chances of the bill's passage.
The article has generated a lively discussion on the Times's comments page (four pages of responses as of this afternoon), with perspectives from a variety of real estate industry players on the merits of -- and problems with -- the HVCC.

According to the Appraisal Institute (their website is here), there are more than 90,000 licensed appraisers in the US.