Buyers usually debate between conventional and FHA financing when purchasing a home. Sellers are usually on pins and needles during the appraisal period waiting on a confirmation on their home valuation by an appraiser. This Friday marks an important date for HVCC – Home Evaluation Code of Conduct. The regulation is effective May 1, 2009 with possible delays (hopefully). What is the HVCC you may ask yourselves? In short, it establishes guidelines for appraisals made for conventional financing. For those that qualify for FHA financing, this will be another incentive for going FHA.
What is Important about May 1, 2009
You may wonder, what is done now in comparison to what is to change on May 1st? At present, a contract is executed and a due diligence period beings. Several things should theoretically occur during the coined ‘Option Period’ including: inspections, survey, appraisal, negotiation for repairs and of course financing. A lender will not lend money unless the property appraises for the selling price (at least). It isn’t uncommon however for large institutions to have an appraisal from other locations due preliminary appraisals even though they have no working knowledge of the area. I had a client once who we had to request for a different appraisal because the lender had hired an appraisal company out of San Antonio to do an appraisal in an up and coming neighborhood in Houston. Well….times will be changing for conventional appraisals…
The Skinny on HVCC – Home Valuation Code of Conduct
- No one associated with the financing transaction (loan officer, processor, etc) can attempt to influence (or bribe) an appraiser to establish market value on a property.
- Appraisers cannot establish preliminary appraisals or value information prior to the completion of the ENTIRE appraisal report. Realtors, loan officers or lenders can no longer have an appraiser establish a particular value before a full appraisal report. This was usually done when sellers wanted to make sure that their homes would appraise just before selling their home.
- An appraiser may be provided an executed purchase contract to establish contributions, concessions, and establish property deficiencies from Seller Disclosure Statements. However, they cannot be provided information from the lender or interested parties regarding borrower’s expected or anticipated loan amount, loan to value or estimated property value at the time the appraisal has been ordered.
- An appraiser cannot be removed from an approved appraiser listing without the written notification to the appraiser which must include explanation of the illegal conduct in violation of the Uniform Standards of Professional Appraisal Practices (USPAP), substandard performance or unprofessional behavior. This does not include of course if the appraiser is not familiar with your area and provides only the basic required comparable information to the lender.
- Lenders (and buyers) are no longer permitted to obtain a 2nd appraisal – even if it is to assure their confidence. The exception would be if there is reasonable basis to believe that the first appraisal is flawed, tainted or if being conducted for a pre-closing or post-funding review via a quality control process.
- Borrowers must receive a copy of the appraisal report immediately upon its completion but not less than three days PRIOR to closing. A buyer may waive this right (although you are always encouraged to have a copy of your appraisal report…after all…you’ve paid on average $350 for it).
- The lender or their authorized party must select, retain and provide payment for all compensation paid to appraiser. A lender cannot accept an appraisal if the appraiser is compensated by anyone other interested party to the transaction. Simply put, you won’t be able to select your appraiser as a buyer – the lender must select and pay it. You will however be charged as part of your closing fees.
- Loan production staff (loan officers, originators, etc) cannot suggest, request, influence or communicate with the choice of appraiser used on any particular appraisal.
- Lender is responsible for making sure the selection of an appraiser for a transaction is separated from loan production staff. Lender employee assigned to select appraiser must be qualified in the area of real estate appraisals.
- A lender cannot obtain appraisal reports to be used for underwriting from any appraiser who is employed or jointly owned by the lender, affiliate, entities owned in part or fully, settlement service providers with interest, appraisal management agency owned in part or fully by the lender. However, it is ok if the lender owns less than 20% interest in the affiliates and affiliate is operated independently. The lender cannot play a role in the appraiser selection process.
- The lender must establish a hotline and email address monitored by General Counsel, Chief Compliance Officer or other officer to receive complaints from appraisers, individuals and other entities concerning improper influencing and violations.
- Any appraiser selected from an appraiser list must be provided with a hotline number and email address as well as each borrower for which the lender requests and provides a copy of the appraisal.
- Lender must respond to complaint requests within 72 hours, complete investigations within 60 days and notify the Independent Valuation Protection Institute of any relevant regulatory bodies of improper conduct or violations.
- The lender is required to test, by quality control, 10% of the appraisals and valuations used to make underwriting decisions and must report findings to the Independent Valuation Protection Institute.
- The lender is responsible for warranting and representing that any appraisal report used in underwriting decision was provided in manner that meets the requirements of the HVCC.
Who is Exempt from HVCC?
One thing to clarify for everyone is that the HVCC does NOT apply to FHA appraisals. This only applies to Fannie Mae and Freddie Mac. The sale of the following mortgages is excluded from the representation and warranty: FHA/VA Mortgages, Section 184 Native American Mortgages, and Section 502 Guaranteed Rural Housing Mortgages.
What should the Realtor and Seller do?
I recommend having a complete list of improvements with copies of receipts for all improvements made to the property since you purchased it. You can call it your “Appraisal Package”. This will assist us in providing the appraiser with as much information regarding recent improvements for them to do cost analysis and depreciation analysis when doing the appraisal. Knowledge of recently sold homes is also good if an appraiser is not completely aware of the area. Make sure you are pricing your home properly and not overly priced for the neighborhood. Although many appraisers may go outside the immediate area of there aren’t recent comparables, some will not. There must be at least 3 sold comparable homes within proximity and at least 1 active or pending comparable to help your cause.
Useful Download Links:
Download the Home Valuation Code of Conduct fact sheet
Download the Home Valuation Code of Conduct
Frequently Asked Questions from Freddie Mac
Information Provided By:
National Association of Mortgage Processors
Freddie Mac Website
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