On the road to hell…

My mom used to use a particular phrase a lot when I was growing up. Whenever I used the excuse that I had intended to do something but had not done it, she would say, “The road to hell is paved with good intentions.” I suppose somewhere along that road are the good intentions of the people who came up with the Home Valuation Code of Conduct (HVCC). Per haps it is also just another example of lawmakers rushing to do something about something that is bad and ending up creating something worse – the law of unintended consequences.

HVCC was a well-intentioned try at dealing with the too cozy relationships (or too pressured relationships) that existed between banks and appraisers. The ability of the banks, through those relationships, to influence the appraisers work contributed greatly to the real estate crisis, which precipitated the financial recession that we are in. So, obviously something had to be done to fix that. Enter the politicians; trying to make names for themselves and to appear to be leading the effort to reform these nefarious practices, they rushed through the HVCC as their solution.

The idea behind HVCC had merit – to try to insulate the appraisers from any undue influence by the lenders. The devil in this case was in the details, or maybe the lack thereof. The three-page law is so vague that lending giants Fannie Mae and Freddie Mac have had to publish 5 pages of frequently asked questions to try to clarify it. At it’s core it moved the responsibility for hiring the appraisers away from the lenders and requires a middleman role, with an appraisal management company (AMC) in between the lenders and the appraisers. Ironically enough it was the practices of an AMC in influencing its appraisers that initially kicked off much of the concerned that caused the law to be written.

So now everyone should be happy right? We have solved the problem by creating another level of bureaucracy to protect the consumers’ interests. So, why the furor? Well that new level of bureaucracy was not free. It increased the costs to the consumer. It also required appraisers to work through those AMCs and the AMC owners have used that as a lever to reduce what they pay for appraisals. So both the appraisers and the consumers got the Ziggy on this. The only winners were the AMC owners, many of whom it turns out were the same clowns who were making bad loans a few years back Many appraisers have left the business rather than work for the lower pay that the AMC’s offer. The results have been a disaster in many areas, with AMCs assigning out-of-area appraisers who are unfamiliar with the local market to do many appraisals and the buyers and sellers, the banks and the realtors powerless to do anything about it. Deals have been delayed or lost altogether, due to poor appraisals.

What’s next on this issue? Nothing motivates a politician more than the opportunity to save us from ourselves. Likely some well-intentioned politician will see an opportunity to make a name for him/herself by fixing this mess and we will undoubtedly progress further down the road to hell.

I opined yesterday in this blog about the new bill that Congress is now considering to reform mortgage lending and pointed to the unintended consequences that oft accompany the well meaning, if misguided attempts by our fearless representatives to save us from all manner of evil, including ourselves. Then I saw a discussion of the new HVCC law that is due to go into affect in June. This is the law that is saving us from bad appraisers who, in cahoots with bad mortgage lenders, set up mortgage mills to crank out bad mortgages to people who couldn’t afford the homes that they bought. These are part of the clown posse that caused the mess that we are in today.

There doesn't appear to be anything all that threatening in the HVCC itself (read it at http://tiny.cc/uLrH8 ), however the devil is in the details of the implementation of the law and the lack of preparation on the part of the parties most involved top actually manage the process. Of course the customer is once again screwed in the process, because the process adds cost and who do you think pays for that - not your loyal Congressman.

What a classic case of Congress coming along well after the fact to solve a problem that has already largely solved itself by blowing up the market for it's services. The clowns who got the mortgage industry and it's clients into such a mess are now all working for short sale or mortgage loan modification companies, with promises to get them out of the mess that they put their clients into in the first place.

And what about the sleazy appraisers who were a part of that game? Many of them have now set up mortgage appraisal management companies, so that they can take a scrape by managing other appraisers. Many of these companies are reportedly run by ex-appraisers who lost their licenses due to fraud or other shady practices. Great qualification for setting up an appraisal management company; but then, there are no rules for that, so the wild, wild west just moved up a notch in the management stream. You gotta love the American entrepreneurial spirit.