The HVCC Prolongs the Housing Slump

In March 2008, a joint agreement was announced between the Federal Housing Finance Agency, Freddie Mac, and Andrew Cuomo, the New York Attorney General, to institute the Home Valuation Code of Conduct, or HVCC. This code was intended to curb some of the worst excesses of appraisers acting on behalf of lenders by ensuring that appraisals reflected the accurate worth of property and that no undue influence was exerted on appraisers by lenders, real estate brokers, or local real estate agents. Initial reaction to the announcement was overwhelmingly positive; the HVCC was praised as a positive step during the aftermath of the subprime lending collapse and lauded as a much-needed change in the way appraisals were handled. The HVCC went into effect in May 2009, but most lending institutions began implementing it in advance of its effective date.

Unintended results were seen nearly immediately. Because the HVCC requires lenders to have no material influence over the appraisal process, independent appraisal management companies (AMCs) were formed to serve as middlemen between lending institutions and appraisers. Lenders still were paying about the same amount for their appraisals, but a sizable portion of that amount was going to the AMCs, so appraisers were being paid considerably less for the same work. This pay cut meant that less qualified and less experienced appraisers were being hired by the AMCs, resulting in less accurate appraisals. While the discrepancies were due to less competent appraisers rather than pressure from the lenders, the net effect of an inaccurate appraisal was precisely the same. Even when highly qualified appraisers were employed, the reduced payment per appraisal meant that those appraisers had to perform more property assessments in the same amount of time or suffer a pay cut; this also resulted in less accurate property appraisal. No oversight mechanism currently exists for AMCs, so these inaccurate appraisals are generally not reviewed or corrected.

One provision of the HVCC could potentially penalize lenders and appraisers for appraisals that overstate the property’s value. Fear of these penalties has led to perhaps the worst unintended side effect of all: the artificial devaluation of property. Many experts believe that the HVCC has actually prolonged the housing market slump by creating pressure for appraisers to bring in lower assessments of worth. Appraisers determine the value of property by looking at comparable properties and obtaining an average cost that similar homes or properties have sold for; in the current housing market, a percentage of those sales may have been due to foreclosure. The pressure to bring in lower appraisals has resulted in situations where homes are appraised at far less than their value on the housing market, preventing buyers from obtaining a mortgage for the fair value of the home and forcing owners to either sell their home at an artificially low price, or not sell it at all.

Consumer costs have risen by an estimated $2.8 billion due to the HVCC, according to the National Association of Mortgage Brokers. Since an entire level of bureaucracy has been added to the appraisal process, the additional cost is passed on to home buyers. Additionally, many home sales are lost due to the artificially low appraisals, which prevent financing from being approved. Experts believe that, far from addressing the real estate industry’s woes, the HVCC has actually contributed to them and prolonged the housing market slump.

Consumer protection agencies and housing industry leaders have organized petitions calling for a reversal of some of the HVCC’s provisions. On June 25, 2009, Congressman Travis Childers, a Mississippi Democrat, and Congressman Gary Miller, a California Republican, introduced a bipartisan bill that would impose an eighteen month moratorium on the provisions of the HVCC. This bill has been under review in the House Committee on Financial Services for some time, but promises relief for homeowners and new home buyers from the arbitrary and ill-conceived provisions of the HVCC

White House – Start Lending Money Now!

White house served notice to banks who received bailout packages to start lending money.

It was known that banks did not use the bailout money to lend. They were simply sitting on the cash and only buying out distressed banks. Credit market remained closed even though there were some signs that credit was moving. Wall Street responded in negative way as many Americans could not get a loan. Therefore, white house stepped in.

“What we’re trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money,” White House press secretary Dana Perino said.

Anthony Ryan, Treasury’s acting undersecretary for domestic finance, made the same point in a speech in New York before financial executives.

“As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the U.S. economy,” Ryan told the annual meeting of the Securities Industry and Financial Markets Association. “It is in a strengthened institution’s best financial interest to increase lending once it has received government funding.”

Treasury is buying preferred shares in banks in return for cash infusion, however; about 6,000 banks are not publicly traded and cannot get funding due to restrictions Treasury currently has.

Treasury is currently working on a plan where both banks, publicly traded and private can qualify for the program.

Treasury has pumped up money to help economy get back on its track and avoid national recession. Treasury Department will buy $125 billion of preferred stocks from nine largest banks, which account for 50 percent of all U.S deposits. An additional $125 billion will be passed to banks in upcoming weeks.

Rep. Henry Waxman, D-Calif., chairman of the House Oversight Committee, asked banks who received $125 billion to address executive pay, employee pay and other bonuses.

“I question the appropriateness of depleting the capital that taxpayers just injected into the bank through the payment of billions of dollars in bonuses, especially after one of the financial industry’s worst years on record,” Waxman said.

Many reports were surfacing when news spread out that banks are only buying other banks and have no intension of lending and opening their credit lines. Indeed, the government approved PNC Financial Services Group Inc. to receive $7.7 billion in return for company stock on Friday and, at the same time; PNC said it was acquiring National City Corp. for $5.58 billion.

However, there is no language in bailout plan that would tell banks to use the money for lending. Many officials argue that attaching requirements, banks will discourage to take advantage of this program.

Other efforts have included:

-A Federal Reserve program, to commercial paper or business debts.

-Temporary guarantees by the Federal Deposit Insurance Corp. of new issues of bank debt fully protecting the money, for a fee, even if the institution fails.

-Emergency loans from the Fed for financial institutions.

-A temporary increase in the cap on deposit insurance from $100,000 to $250,000 on interest-bearing accounts, and unlimited deposit insurance for non-interest bearing accounts, which small businesses often use to cover payrolls and other expenses and which frequently exceed $250,000.

-The Fed’s half-point reduction in its target interest rate on Oct. 8, done in conjunction with rate cuts by other central banks around the world.