Why HVCC killed the mortgage business

As a closing attorney, I am on the 'front lines' as it relates to real estate. People ask me about the current trends or "what's really going on" as it relates to real estate. When I talk about our current conditions and why we remain 'stuck' in this real estate recession, my typical response has nothing to do with Wall Street or sub-prime loans--it's all about a little-known regulation called "HVCC" (I bet the mortgage people out there just had a collective shiver up their spine).

The concept behind HVCC (Home Valuation Code of Conduct) was noble enough--a loan officer should not be able to 'push' an appraiser into giving a higher value for a property. HVCC insulated the appraiser from loan officers entirely by using Appraisal Management Companies (AMC's) who now handle the entire appraisal process (LO's submit the property; the AMC will line up the appraisal and provide the finished product to the LO/Lender). Again, sounds reasonable, right? Well, the law of unintended consequences kicked in and the AMCs have either used low-cost providers that aren't very experienced or they've used appraisers that aren't up to speed on the area. Think of your own part of town--could you guess values on properties 20 miles away? I know appraisers aren't guessing (and this is not to throw rocks at qualified appraisers) but some of the people the AMCs use seem to be 'going through the motions' and (as they aren't getting paid market rates for their work) they aren't producing the best quality work. Low-cost providers aren't typically the best products (e.g. you get what you pay for).

My typical analogy for this is take someone who lives in the burbs and typically appraises mega-mansions worth $1M or more out in North Fulton--what happens when they have to do an in-town 'bungalow' that essentially would (should?) be valued at the same pricing? Typically, it doesn't compute and they have issues setting the true value for that in-town property. I hear that LOs can now 'appeal' values with the AMCs and changes are coming (perhaps the 'death' of HVCC?). Sure, HVCC isn't the only culprit, but it's one 'behind the scenes' issue that continues to haunt us. Likewise, there are even more dark clouds on the horizon as new legislation may create more levels of government interference in the industry, again with good intentions (such as lowering costs for borrowers).

Take FHA for an example. With FHA loans, there is an up-front mortgage insurance cost (that is rolled into the loan) and a monthly MI premium. So here's some info about the newly revised FHA program--the up-front MI is now lower (only 1% of the loan amount vs. prior amount of 2.25%). Great, it will cost your borrower less to get that loan, so hooray, right? Wrong! While the up-front charge is now lower, the monthly premium is now higher (from .55% to .90%)! I read an example in the AJC noting a $200K purchase price and a loan of $193K. Old monthly MI was reportedly $88 a month and the new MI will be $148/month! OUCH. The up-front MI is a one-time thing--but that extra $60 is due every month. So again, what sounds good ("lower costs") may not turn out to be a good deal for consumers!

The bottom line is this--many of the relaxed lending standards began years ago with the stated goal of getting more people in houses. Unfortunately, standards were 'too' loose and some people got in over their heads. We are now mopping up from that mess and now we face even more issues with tight credit, no credit and even the foreclosure moratorium is going to affect our industry. Regardless of all that, we shall persevere! Get out there and get some business! If you're over 5% and need to refi, get moving while rates are crazy low! Remember us when you need a closing attorney, no matter where you or your clients are located! Have a great week, Bo