We posted on May 1, 2009 about HVCC on Conventional loans which stated:

Up until now the loan officer had the control to select an appraiser they felt had the best ability to appraise the house that would be used for the collateral for the mortgage loan.  That was the idea.  The problem was that some lenders would influence or coerce appraisers to appraise a property at a certain value in order to make the transaction work.

We went on to explain and quote the Home Value Code of Conduct:

the Code of Conduct also states that all members of the lender’s loan production staff…shall be forbidden from:

selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assignment or for inclusion on a list or panel of appraisers approved to perform appraisals for the lender or forbidden from performing such work

having any substantive communications with an appraiser or appraisal management company relating to or having an impact on valuation, including ordering or managing an appraisal assignment

Those changes only impacted Conventional Mortgages.  Effective February 15, 2010 FHA Mortgages have a similar ruling.  In HUD’s Mortgagee Letter 09-28 they implemented Appraiser Independence which states:

Prohibition of mortgage brokers and commission based lender staff from the appraisal process

Although this mortgagee letter explained this was to go into effect January 1, 2010 the effective date was extended out until February 15, 2010.

So What Impact Does this Have?

Minimal.  The reason the impact of this change will be minimal is because when the HVCC ruling went into place for Conventional Mortgages many lenders adopted a similar process for FHA Mortgages, even though it wasn’t required.  Most lenders, and customers are already having to deal with this change even though it has not “officially” been in place.

Lending A Hand

Scott Wynn

The Wynn Team

So What Has Changed?

The largest change is in the selection of and communication with the appraiser.  Up until now the loan officer had the control to select an appraiser they felt had the best ability to appraise the house that would be used for the collateral for the mortgage loan.  That was the idea.  The problem was that some lenders would influence or coerce appraisers to appraise a property at a certain value in order to make the transaction work.  Obviously this creates a problem in the market of inflated appraisals or inaccurate valuation that can impact not only the mortgage investor but the homeowner as well.  The Home Valuation Code of Conduct spells out the prohibited influence over appraisers to include:

• withholding or threatening to withhold timely payment or partial payment for an appraisal report
• withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser
• expressly or impliedly promising future business, promotions, or increased compensation for an appraiser
• conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary value estimate requested from an appraiser
• requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report prior to the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report
• providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided
• providing to an appraiser, appraisal company, appraisal management company, or any entity or person related to the appraiser, appraisal company, or appraisal management company, stock or other financial or non-financial benefits
• allowing the removal of an appraiser from a list of qualified appraisers, or the addition of an appraiser to an exclusionary list of disapproved appraisers, used by any entity, without prompt written notice to such appraiser, which notice shall include written evidence of the appraiser’s illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP) or state licensing standards, substandard performance, improper or unprofessional behavior or other substantive reason for removal (except that this prohibition will not preclude the management of appraiser lists for bona fide administrative reasons based on written, management-approved policies)
• ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model (AVM) in connection with a mortgage financing transaction unless: (i) there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or (ii) unless such appraisal or automated valuation model is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control process or underwriting guidelines, and so long as the lender adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value
• any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality or violates law or regulation, including, but not limited to, the Truth in Lending Act (TILA) and Regulation Z, or the USPAP

To assist in avoiding such practices to occur the Code of Conduct also states that “all members of the lender’s loan production staff…shall be forbidden from”:

• selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assignment or for inclusion on a list or panel of appraisers approved to perform appraisals for the lender or forbidden from performing such work
• having any substantive communications with an appraiser or appraisal management company relating to or having an impact on valuation, including ordering or managing an appraisal assignment

What Does This Mean For You?

My view, of course, is from the lending side of things, although I am a consumer and home owner myself.  What all of this means is that we (all those impacted by the real estate in the United States) will receive a more objective value of the real estate when completing appraisals.  This is good, right?  I think so and I think most ethical lenders would agree.  We don’t want to do a mortgage for a buyer that they believe to be worth more than it really is.  We also do not want to close a mortgage loan on a home that would be greater than what the home is worth causing a potential foreclosure in the future.  Mortgage lenders have two responsibilities when originating mortgage loans:

• Protect the customer obtaining the mortgage
• Protect the mortgage investor

If a lender where to influence or coerce an appraiser to inflate the value on an appraisal to get the deal done neither the customer nor the investor is being protected.  Rather the loan officer is looking out only for him/herself.  

You may wonder if there are any negative consequences to this change.  I believe there may be one small side effect to this change.  Many times lenders would call on their appraisers to provide them with a general idea of value on a property before completing a full appraisal.  This allowed lenders to provide the customer an idea of the value and the impact on the loan before the funds to complete an appraisal were committed.  For example, a customer may be interested in purchasing a $250,000 home and put the minimum down payment of 3.5% (FHA).  If the property appraises at $250,000 or greater the customer would have no problem with doing that.  Let’s say that instead the appraisal came in at $245,000.  The higher purchase price compared to the appraised value would require the customer to put an additional $5,000 down in addition to the normal 3.5% down to make the purchase possible.  Of course the alternative would be that the seller would sell the home for $245,000 instead of $250,000 therefore allowing the buyer to purchase with the 3.5% minimum down payment.  Prior to this change the appraiser would have contact with the lender to ask whether he should proceed with the appraisal or not.  The lender could then talk with the customer and provide them the option to proceed with the appraisal and pay the cost of the appraisal or stop the appraisal from being done and little to no money was spent on a transaction that would not have worked anyway.  Now, this will not be possible and once an appraisal is ordered the funds are committed and the appraisal will be done, despite the value of the home.

This, although explained as a potential downfall, may be viewed by some as a positive.  Time will tell how this change will impact the mortgage and real estate industries or the real estate economy as a whole.  Keep in mind that this change, for now, is only on Conventional mortgages and does not impact FHA mortgage appraisals.

Lending a Hand

Credit:  The best credit takes years of past payment history with on time payments and very few changes.  Obviouslly if you are looking to buy a home in the near future you do not have years to work on your credit and still want to do everything possible to increase your score.  This topic is huge and could not be covered in this post, today.  Here are some quick tips.  Pay everything on time for as long as you can.  Keep accounts open as long as you can.  Keep the balances compared to the limits as low as you can.  If you do those three things related to credit, you should have a pretty darn good score.

Capacity:  How prepared are you for a mortgage payment you are looking to obtain?  Do you have adequate income to qualify for the payment?  Do you have the type of income that can be used by a mortgage lender?  Mortgage lenders love a minimum of a two year history of employment.  If you have two years on any job with the same type of income (salary, hourly, OT, bonus, commission, self-employed, etc) over those to years, you will be set to document the income you earn.  For the buyer who has self-employment income or an income source that allows for you to write off expenses before paying taxes, consider that the mortgage lender can only count the income that you pay taxes on, not the full amount.  That also means that if you receive cash tips and do not report those tips to the IRS, the mortgage lender will not be able to use that income for qualifying.

Collateral:  You don’t have a lot you can do to increase how the lender looks at the collateral, or the home you are financing.  All I can say, is that you should find the house that works for you, is in good shape and can be resold at a later date when you decide you would like to move on.  Sometimes people find a home that is very unique or difficult to finance (manufactured homes can be difficult to finance and therefore difficult to sell).  Consider the home you buy will need to be sold and financed by the buyer.

This doesn’t cover everything you would need to do to prepare to get the best home loan possible, but these items will put you in a better position than most.

Scott