Bankers Get Full Ride on HVCC
The way loan brokers are feeling these days they've lost the HVCC war and banks won and it's probably just a matter of time before the entire brokerage sector evaporates into thin air. That's the worst-case scenario. The final chapter has yet to be written for brokers. But the new Home Valuation Code of Conduct rule that went into effect May 1 is certainly a win-win for the nation's mega-lenders, especially those with appraisal management companies. Which mega-banks have AMCs? According to our sister publication, American Banker, it's the big four of residential finance: Wells Fargo, Bank of America, Chase and Citigroup, all of which (of course) are beneficiaries of TARP money.
And what exactly is an appraisal management firm and what do AMCs have to do with the new HVCC? First let's talk about the HVCC. The way loan brokers view it HVCC is a regulation jammed down the throat of the GSEs by New York attorney general Andrew Cuomo, who sees brokers at the crux of the nation's mortgage meltdown.
HVCC prohibits any and all loan brokers from ordering appraisals on a home whose funding they are facilitating. Just to be fair, HVCC also prohibits retail loan officers at mortgage banking firms (including banks and thrifts) from ordering appraisals. The fear is that there could be a "conflict of interest" because a broker or LO might be able to influence the home valuation by choosing an appraisal firm that's friendly to them, one that can "bring in" the appraisal so it doesn't screw up the house sale because the said appraisal is less than the home's sale price.
But wait, HVCC allows the underwriting department of a retail lender (a bank, for example) to order the appraisal. And as we all know there is a "Chinese Wall" between the retail LO and the underwriting department. Right? Correct - and that's why at Christmas time LOs give nice bonuses to their favorite (read: compliant) processors.
But there's more: HVCC allows a retail lender to obtain an appraisal through an AMC even if that lender's parent owns part of the AMC. Sounds like a conflict of interest to me. Oh, and brokers have to pay AMCs because only AMCs can order appraisals, that is, if you're a broker.
If the regulators wanted to get HVCC right they would ban banks (thrifts, etc.) from owning AMCs outright. Banks should be allowed to have in-house appraisal departments to review appraisals - but not to perform them. In my mind that task only should be done by an independent arms-length appraisal firm. Then and only then can the system have the appearance of being "clean."
Then there's the whole mystery of what exactly an AMC is. I asked the question of Bill Garber of the Appraisal Institute in Washington, a trade group that represents appraisers. "HVCC doesn't define AMCs," he told me. Also, no one regulates AMCs either. (How did that one get past Cuomo?)
Legislation is pending in Washington that would both define AMCs and set up state regulation of these entities. Hopefully, it will pass. But in the meantime brokers and retail LOs can't order up appraisals. Marc Savitt, president of the National Association of Mortgage Brokers, is hopping mad about HVCC because every time he facilitates a loan his shop has to pay $150 to an AMC. He can either front the money himself or ask the consumer for it. A retail loan processor can order an appraisal using an AMC that his parent owns a piece of. Sweet.
This comes from a Connecticut-based mortgage broker: "We are not operating on a level playing field. Processors at mortgage banking firms are allowed to interact with appraisers. It is only brokers who are cut off entirely.
There are mortgage banking firms out there who are actively and aggressively now recruiting LOs from brokers, saying they do not have to comply with HVCC. What a mess!"
There's one silver lining (possibly) in all this HVCC hoopla. According to Mr. Garber, the reg expires in 18 months and Fannie Mae and Freddie Mac can do whatever they want after that. But will loan brokers still be around?
Paul Muolo can be e-mailed at Paul.Muolo@SourceMedia.com.