Real Estate Insight

Home Valuation Code of Conduct (HVCC)

Lawmakers in Washington are considering a law that will change how appraisers interact with lenders and agents. It seems that during this time of distress every lawmaker wants to look like they are doing something without really addressing the problem. What does that mean? Law makers are trying to say that appraisers significantly contributed to the current mortgage crisis by over valuing properties. The basic line of reasoning says that because Appraisers have to get their business from Mortgage Brokers & Lenders they were coerced into appraising the property for more than it was worth. This then contributed values spiraling upward, homeowners taking cash-out and the eventual mortgage melt down.

Please! Before trying to pass new laws Washington should look at the “Elephant in the Room.” I am not taking away the fact that there are bad people in every industry… including politics. What I’m saying is start with the biggest problems and work down to the smaller issues.

Matthew 7:3-4
”Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye? How can you say to your brother, ‘Let me take the speck out of your eye,’ when all the time there is a plank in your own eye?

The speck is over valuation by appraisers.
The plank is lending practices and guidelines dictated by Wall Street Investment Banks.

Values spiraling upward had much less to do with appraisers over valuing property and more to do with lending guidelines and consumer sentiment. Just look at the types of loans originated.

- Prior to 2002 – Amortized, Fixed Rate, Verified Income – people could qualify
- 2003 Amortized, Fixed Rate, Stated Income – people had to fib on income to qualify
- 2004 ARMs, Stated Income – people had to fib on income and take a lower initial payment to qualify
- 2005 Neg Am & Interest Only ARMs, 100%, Stated Income – people had to outright lie about income and take low initial payments. Underwriting became about reasonableness of stated income… is it reasonable for the McDonalds fry guy to make $5,000/mo?
- 2006 Neg Am & Interest Only ARMs, 100%, No Income – The income lie became so ridiculous that lenders said don’t lie in fact don’t put any income.

The simple math behind the melt down is that Lenders/Wall Street designed loan programs that were easy to qualify for and had an affordable initial payment. This allowed more people to buy and more people to buy multiple properties. The availability of easy money and consumer sentiment of “get in before it is too late” caused high demand and less thought about affordability after the teaser payment. More demand leads to higher prices, higher prices leads to sentiment of “get in before its too late”, which leads to more demand. What Law Makers are proposing would is in Jesus words, removing the speck while ignoring the plank.

Of course the sad irony… Lenders/Wall Street Investors are getting bailed out by the Government!

Colin Wright.