The only thing that saves us from the bureaucracy is inefficiency. An efficient bureaucracy is the greatest threat to liberty.” Eugene McCarthy
In the spirit of an inefficient bureaucracy, and under the guise of “economic recovery”, we’ve seen several new edicts handed down from the mountain lately. The 2 most onerous directives go by the handy handles of ‘HVCC’ & ‘HERA’. Both attempt to right the wrongs perpetrated in this last housing runup, but from my perspective, they are relatively undisguised attempts by big banks to utilize the fear in the marketplace to have their way, creating legislation that does little to remedy the actual problems, while pushing the BIG BANKING agenda well down the road.
The Home Value Code of Conduct (HVCC), enacted in April, puts severe restrictions on the lines of communication between lenders and appraisers, requiring the use of an automated online system to place appraisal orders, while keeping lenders and brokers from speaking directly, and purportedly preventing the collusion that took place in the dark ages between ’04-’07.
The fly in this ointment is the reality that quality work requires quality people. The new system requires lenders to draw anonymously from a predetermined pool of appraisers, who indicate their acceptance of the offered appraisal, with it’s attached valuation for the work. That sounds fine, but this is where things start getting sticky. In the past, the lender/broker would call their appraiser, tell them the general spec’s of the property (dimensions, location, etc.) and the appraiser would give them a quote for the appraisal at that time, based on the anticipated time required.
The new system doesn’t allow any conversation. The lender submits the appraisal into the system, along with an amount they are willing to pay for the work. The appraiser reviews the job and either accepts or rejects it. Sounds reasonable, right? The problem is that the prices being submitted are preset by the banks. And as a rule, they’re generally set low. Which means that the appraiser who accepts a low price is typically doing so because they are either inexperienced, or desperate, or both. So the appraisal on the home you’re about to buy is now being done by someone who hasn’t spoken with your lender, their abilities are questionable, and you have no way of assessing their accuracy. Does that sound like the recipe for hope we’ve been looking for?
The HERA or Housing and Economic Recovery Act is another recent piece of legislation governing your GFE, or Good Faith Estimate, and the timelines surrounding your transaction. Initially put into place last year, it became effective August 1, 2009, and is designed to provide what is essentially an extended time Lemon Law for home financing. In essence, it sets specific timelines for the allowable window of days that must pass between your receipt of information, and the next step in the process. The HERA law, as with many things attached to legislation and bureaucracy, has good intentions. The actual effect, however, will be to extend the standard closing period from the customary 30-45 day window to 60 or more, as lenders jump through the new batch of hoops. A sample of the Act is as follows: If the APR increases more than .125% from the initial disclosure, it must be revised and reissued at least 3 business days before closing. If mailed via US Postal Service, it is considered ‘received’ 3 business days after mailing. Additionally, Closing cannot be less than 7 days after the homebuyer is issued their initial mortgage disclosures (GFE) from the lender.
The problem with both of these ‘sausages’ is that the people who have to implement them were apparently not involved in their creation. You can say that was part of the idea, as it would be counterintuitive to put the fox in charge of the henhouse- but assuming that every participant in any given situation is a fox, leaves little recourse for input when the time comes for change.
Many lenders have reviewed and implemented these changes over the past several months. However, there are some who have adopted a wait-and-see stance, who will likely be bitten.
Be sure to ask your preferred lender what their understanding and compliance of the HERA law is, and consider carefully if you want to risk your home purchase with someone who is not prepared.
Download a summary of the HERA law, HERE.