Home equity equals the value of your property minus the amount of liens against it. But for the purpose of getting a mortgage or home equity loan, the amount of home equity you have equals what an appraiser says your home is worth less the liens against it. Hence, anything that influences how your property is appraised affects your home equity and your mortgage.
The Home Valuation Code of Conduct (HVCC) is an appraisal policy implemented in 2009 to increase the independence of real estate appraisers and therefore the accuracy of appraisals. It was put in place by Fannie Mae and Freddie Mac. Recently, Mortgage News Daily reported that the FHA decided to require its approved lenders to follow a similar procedure. Despite its vast implementation, the HVCC remains highly controversial. What exactly does it do, and how does it affect your home equity?
What the HVCC Does
HVCC says that no one who stands to make money from a real estate transaction--real estate agents, loan officers, title officers, homeowners, or mortgage brokers--can select an appraiser, order an appraisal directly, or contact the appraiser. The idea is that if an appraiser isn't getting business from these people, he or she is under no pressure to push or inflate the property value to facilitate a transaction.
Today, appraisals are ordered through appraisal management companies (AMCs), not by your loan officer.
HVCC Increases Your Mortgage Costs
Unfortunately, the end result of this policy has been an increase in borrower costs. This increase in costs can be attributed to a couple of things. First, AMCs take commissions of up to 50% of the appraiser's fee while adding no value for the borrower. Moreover, with the virtual elimination of all competition in the market for home appraisals, AMCs have reduced appraisers' income while at the same time upping borrowers' fees for appraisals. According to the National Association of Mortgage Brokers (NAMB), fees to borrowers have increased by amounts of $50 to $150 per appraisal.
You Might Get a Poor Appraisal
In addition to increases in cost, the HVCC may mean that there are fewer highly qualified appraisers out there. In the past, a good appraiser had many sources of business. Today, the HVCC puts them at the mercy of one or possibly two AMCs. Increasingly, appraisers are reporting that pressure is far worse under the AMCs -- who have nearly absolute power over their careers under the HVCC rules -- than under the old way. Appraisers have reported that AMCs push them to prepare appraisals in violation of the Uniform Standards of Professional Appraisal Practice (USPAP) and generally accepted appraisal guidelines.
Many of the most knowledgeable and skilled appraisers are unwilling to work under such conditions. The result is that the appraisers who remain may be less qualified, which in turn may be contributing to a decline in appraisal quality. According to NAMB, multiple appraisals of the same property routinely produce values which differ by up to 20%. If your home appraises for less than it's worth, you have less home equity than you should--and that means you may pay more for your mortgage or be allowed to cash out less of your home's true value.
You Could Blow Your Mortgage Rate Lock
Finally, HVCC has removed the appraisers' incentive to provide good service. In the past, appraisers who provided fast turnaround and good communication could be rewarded with repeat business. Because of HVCC, the indifferent or incompetent are not penalized and the capable and motivated are not rewarded. Your chance of getting excellent service and a quick report are worse than in the past. Appraisals are, in general, taking longer than they used to. This could cause borrowers to close on their loans late, blowing an interest rate lock or even derailing a property purchase.
What You Can Do
First, when comparing mortgage interest rates and terms, take a look at the fees and especially the appraisal charges. That should be part of the comparison you do. Question fees that come in significantly higher than those of other mortgage lenders -- an AMC may be to blame.
Second, allow plenty of time when calculating a closing date for your mortgage. That means putting reasonable time limits in your real estate purchase contracts and choosing sufficiently long mortgage interest rate locks as well.
Finally, if you feel your appraisal was improperly done, have a couple of experts (good real estate agents or other appraisers) look at it as well. If they think you could do better, get another appraisal. Your lender is allowed to order an additional report by a different appraiser. Though you'll probably have to pay for it, redoing a bad appraisal could be well worth the out-of-pocket cost in the long run.
More help from HSH.com
Home equity borrowing basicsOur new Guide to Home Equity Loans and Lines of Credit (HELOCs) starts here.
Accessing your home equityThis first article of Section II of our Guide to Home Equity Loans and Lines of Credit looks at the various ways lenders allow you to access your home equity, and discusses key differences between loans and lines.
Determining how much home equity you can borrowArticle 3 of Section I of HSH.com's Guide to Home Equity Loans and lines of credit, we explain how to reckon your equity stake and discuss criteria lenders use to decide how much they'll lend to you.
Using home equityThis is the second article within Section I of HSH.com's Guide to Home Equity Loans and Lines of Credit. In it, we discuss some common and valuable uses of your home's equity, and some you may want to avoid.
Understanding home equityThis is the first article within Section I of HSH.com's Guide to Home Equity Loans and Lines of Credit. In it, we explain what home equity is, how you get it, how you can build it and why you should protect it.