Interim Final Rule Versus Home Valuation Code of Conduct

On October 18^th, 2010 the Federal Reserve revealed the new “Interim Final Rule”, as a result of the highly criticized Home Valuation Code of Conduct (HVCC). The HVCC, created after the housing bubble crashed, made it much harder to get an accurate home value and get approval on a home loan. While the new rule will not be in effect until April 1, we can speculate that it will have a better impact on the housing market.

The HVCC was initially created to shield appraisers from undue pressure to over-value a home so it would qualify for a higher home loan. In order to do so, the HVCC forced appraisals to be ordered at arm’s length and use national management companies to hire appraisers. Under the HVCC lenders and agents seeking to issue a loan cannot hire an appraiser familiar to them. Furthermore, the communication with an appraiser is prohibited.

The biggest issue created by the HVCC was the hiring of inexperienced appraisers who were not familiar with the local market. Those appraisers, who were not familiar with the market, often gave very conservative appraisals and even included foreclosures as comparable sales. This caused the pendulum to swing in an entirely opposite direction, as properties became undervalued versus the overvalue they received during the housing bubble.

The new rules continue many of the major elements of HVCC, including a ban on the use of coercion to get an appraiser to put aside his professional judgment and provide an overvalued appraisal. It continues to uphold conflict-of-interest guidance, which prohibits loan officers and mortgage brokers from selecting appraisers.

The new rules allow lenders or builders to ask an appraiser to take into account additional information that may have been overlooked in the initial appraisal including information about comparable properties. It also requires that appraisers be paid “customary and reasonable” fees to encourage the use of well-qualified appraisers who are familiar with the local housing market. The new rules also encourage that any incidents associated with the misconduct or negligence of an appraiser be reported immediately to state appraiser licensing authorities.

Many individuals in the real estate, building and lending industries are welcoming the changes and are only concerned with the enforcement. They hope that the new rules will be a step in the right direction with its tougher penalties. Both consumers and industries could receive a major benefit if the new rules are enforced properly.

As custom home builders we sometimes feel that appraisers should consider additional information about a property, particularly because there aren’t often an overwhelming number of comparable properties. In several cases, we have seen appraisals that are based on completely inappropriate comparables.