Unethical Appraisal Processes During the Real Estate Boom
During the heyday of the new millennium real estate market, 2000–2006, unethical and sometimes illegal actions became common in the housing appraisal industry. Inflating values became the name of the game. Since most everyone believed there was no top to the market, this rounding off upward was supported by all of the players. Appraisers who answered to banks, realtors and mortgage companies tended to value properties higher than their worth often under pressure from their vested employers.
Inflated Appraisals Contribute to Bursting of Real Estate Bubble
These unsupportable high appraisals eventually helped drive the real estate bubble to burst in late 2006. These unwise practices finally led to legal action by the Attorney General of New York in late 2007.
Trying to keep everybody honest, New York attorney general Andrew Cuomo sued the appraisal subsidiary of First American for conspiring with Washington Mutual to inflate appraisals. The problem later spread to the mortgage giants Fannie Mae and Freddie Mac with national disastrous results for everyone.
An Attempted Fix of the Appraisal Process – HVCC
The public embarrassment surrounding this law suit forced all major lending agencies into creating the “Home Valuation Code of Conduct” (HVCC). The HVCC established a stringent set of rules addressing who can conduct appraisals and how they should be done. Under these new rules, the appraiser may not be affiliated with or have any contact with any parties involved in the transaction.
HVCC’s Intention to Protect the Consumer Backfires
The new HVCC rules took effect in May of 2009 and, ironically, are now working against our now slowly recovering housing market. Appraisers, who are unaffiliated with anyone connected to the sale, are under no pressure to meet deadlines and often submit low appraisals based on a lack of substantiating information regarding the properties they are working on. This downward bias will slow recovery and further push against the market when we need everything going our way.
A Example of HVCC Pressures at Work in Cardiff, CA
Here’s a personal example of what happened to me as a North San Diego Real Estate Agent, helping a client try to purchase a Cardiff CA condo. My buyers were renting a unit in Park Place Bluffs, a lovely Cardiff CA condo complex. They very much wanted to buy a property there. When one came on the market, a short sale, of course, and asking $265k-305k, they submitted an offer the first day, smack in the middle: $285k. Unfortunately, 18 others also wrote offers! We were all asked to resubmit our highest offer, and did so at $310k. The 5 top bidders (we were among them), with offers between $310 and $320k, were then instructed to rewrite our offer for $290k, BECAUSE THAT IS WHERE THE LISTING AGENT THOUGHT THE PROPERTY WOULD APPRAISE!!, and submit along with credit scores, recent bank statements, recent pay stubs, etc, and the best candidate would win! We ended up not being selected, and my buyers actually found a much better home in a different neighborhood. So, here’s a property that 19 people were clamoring all over to buy, 5 of whom were willing and able to fork up between $310k-$320k, and it’s on the books as $290k!! This does not help home values stablizie and recover!
Bottom Line – HVCC is Bad for Real Estate Recovery
The new HVCC has merit and in a normal market could work well. But now, when the market is just beginning to recover, is not the time to push prices down by undervaluation. This new solution for a past problem should be suspended until the cure will not kill the patient.
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particular, that means way more rain than we’re used to. There’s no doubt we need it after so many years of water shortages, but the torrential downpours can cause problems. 
