Over the course of the past few weeks, I've
written and
blogged about the angst some builders were experiencing over the appraisal process, particularly since the Home Valuation Code of Conduct (HVCC) took effect on May 1. Proponents of the new code, namely New York attorney general Andrew Cuomo, expected the new rules would ensure more honest home valuations by essentially creating firewalls between appraisers and mortgage lenders and brokers. However, critics have argued that the code has overcorrected for boom-time sins, in fact turning price inflation into price deflation.
The debate has caught the ear of the mainstream media, particularly after NAR's Lawrence Yun all but pinned poor home sales numbers on appraisal issues. But it appears too few of them--CNBC's Diana Olick excepted--have really grasped the issue. Granted there are definitely industry people who are downplaying the problem. Just take what KB Home CEO Jeff Mezger said about the issue during the Q&A session following its fiscal 2Q2009 earnings call last Friday:
Relative to appraisals, every appraisal has its own story and I've read a lot about the change in the appraisal process. Within our business, and our JV with Banc of America, the protocol and procedures that were raised with this change in May were already in place with Banc of America, so that didn't really impact our business at all.
If you get to a specific value on a specific home, you always have the push and pull of what are the comps that are used around it and is the foreclosure an appropriate comp to a brand new home or not? And we just deal with those one at a time. But there's nothing that's happened on the appraisal side that would impact our confidence on the ability to sell homes today.
And takeaways from a recent conference call hosted by Josh Levin, an analyst with Citi Investment Research and Analysis, also suggested that the issue over the code appeared overblown. "PCV Murcor [a national appraisal firm] argued that the HVCC was basically a non-issue and would not depress home prices," Levin wrote in a follow-up research note. (For the record, however, Levin stated in a more recent research note that he believed appraisals were a growing problem that would affect home sales, existing home sales in particular.)
What Mezger said on the call sounded typical of someone who looks at the issue from a national perspective; the issue is incredibly local and it's not every appraisal that's an impediment to a sale. Not to mention that admitting the company struggles with this type of issue could make investors uneasy. And I really didn't expect PCV Murcor to come right out and say there's a problem; after all, critics are complaining about appraisal management companies like PCV Murcor having unqualified and inconsistent appraisers. Both of these sources of insight have reasons for not being alarmist about the issue.
But that doesn't mean it's not becoming a bigger problem; it is spreading to places outside California. As one builder in Chicago said to me in an e-mail: "In Chicago we are beginning to have appraisal issues. We would probably have more if we hadn't lowered our prices so much."
So, with insight like that cropping up in markets near and far, I have to say that I was surprised when James Hargerty, a real estate regular at the business bible--a.k.a. The Wall Street Journal--recently posted a blog entry that not only downplayed the issue, but made it seem almost silly. In his blog post, "What's With All the Moaning About Appraisals?" he basically comes out and says that he doesn't think it's a big deal and that everyone who's been complaining about it is blowing it out of proportion.
I have to say if anyone's blowing it out of proportion it's him. His blasé take on what hangs in the balance--new home sales, inventory reduction, home price stabilization, not to mention a little thing called economic recovery--is borderline trite. Take this snippet from his blog for example:
A few people in Congress have echoed the moans of the Realtors and the mortgage brokers on these appraisal issues. Yet it seems unlikely that Congress, busy with many more pressing issues, will soon get around to another rewrite of appraisal regulation. Mr. Cuomo is having it his way.
Meanwhile, the smarter lenders will go beyond the code and strive to ensure that they are getting appraisers who know the local market and don't play any games with the numbers.
I just think that's a really simplistic take not only on what's happening but also how it will be resolved. Just curious to understand how a lender who contracts with an appraisal management firm is going to have confident control over which appraisers get assigned to which jobs, ensuring that valuations are fair.
No doubt this is exactly what has the NAHB, NAR, and other industry groups up in arms. And there seems to be a few calls to actions, from petitions to lobbying efforts, all to find a work around to the new code. Here are a couple of latest initiatives: