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Frugal Homeowner®



Financial Reform Good News for Real Estate Appraisals

QUESTION:  We recently sold our home and had a nightmare with the appraisal and appraiser.  He was sent from an area more than four hours away, didn’t know the market, and had to call real estate agents to get sales information.  I’m wondering if the financial reform laws did anything to straighten out the appraisal mess?---LZ

ANSWER:  You’ll be happy to know that the financial regulatory reform bill recently signed into law will hopefully streamline the appraisal process, resulting in faster closings, more concise values, and more completed transactions.

One year ago, the quasi-governmental Fannie Mae and Freddie Mac enacted the Home Valuation Code of Conduct (HVCC) that was intended to reduce mortgage fraud.  Instead, it increased costs, delayed appraisals, and generally created chaos in the marketplace.  Efficiency surveys found that many appraisals were delayed by approximately eight days, resulting in lost transactions.  Additionally, regulation forced lenders to use appraisal management companies that charged less and often used appraisers from outside the local marketplace who were unfamiliar with market conditions, as in your case. A survey done by the National Association of Realtors® found that eighty-five percent of appraisers and fifty-five percent of agents reported a decline in appraisal quality.  And when it came to reducing fraud under the Home Valuation Code of Conduct, it failed miserably: mortgage fraud and misrepresentation increased by seven percent from 2008 to 2009.

Many professionals in the marketplace claimed that HVCC instructed appraisers to issue values on the conservative side and attempted to distance the appraiser from the buyer, buyer’s agent, and loan originator.  These practices and low-ball appraisals often fractured the transaction, delaying it, and in some cases, causing it to fall apart prior to closing. When appraisals come in low, buyers are required to make up the difference in cash in order to close.  For most cash-strapped buyers, that’s often out of the question and the purchase falls apart.  Ironically, under HVCC appraisers were paid up to 50% less per appraisal, even though many had to travel hours to and from the subject property.

The newly passed financial reform bill eliminated the HVCC and creates a new Bureau of Consumer Financial Protection that’s designed in part to modernize real estate appraisal regulations for the first time in twenty years.

While lenders and appraisers are still sorting through the language and procedures of the new financial reform bill, the good news is that HVCC and its chaos is now history.  It’s hoped that the new laws allow local appraisers to do their job in a timely fashion, reflecting true property valuations that eventuate in closed real estate transactions.


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