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posted on 25 July 2015

The Impact Of The Home Valuation Code Of Conduct On Appraisals

by Philadelphia Fed

The fallout from the housing bubble raised questions about the accuracy of appraisals before the housing crisis, and, as a response, a set of policies and regulations was adopted to address the conflict-of-interest issues in the appraisal practices.

With significantly tightened regulations and the decline in housing prices in many areas, there were concerns that more home valuations were underestimated and new mortgages became harder to obtain during the crisis, though the upward bias in appraisals that had prevailed during the subprime boom has been reduced somewhat in many markets.

Despite the controversial role of appraisers before and during the most recent housing crisis, there is a lack of empirical research about the pattern of appraisal outcomes and the effects of the interventions adopted since the crisis on appraisals and the housing market overall. This study provides the first empirical examination of the impact of a major appraisal rule, the now-superseded Home Valuation Code of Conduct (HVCC), which was adopted in the middle of the housing crisis, on low appraisals and mortgage outcomes. Appraisal ratio is defined as appraised value less the contract price as a percent of the contract price in this study, while low appraisal is defined as one in which appraised value falls below the contract price.

This study concludes in part ...

The results demonstrate that, in an effort to prevent appraisal frauds and artificially inflated home valuations, the HVCC, which attempted to change the entire appraisal industry fundamentally when the market was in turmoil, had quickly induced significant changes in the housing market. It seems lenders and appraisers generally responded to the rule by becoming more conservative, especially when market conditions were changing rapidly during the housing crisis. The results should shed light on how to design intervention programs in the future, especially during a crisis that is often characterized by a high level of uncertainty and panic.

[click here to read the entire study]


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