Impact of the Home Valuation Code of Conduct on Appraisal and Mortgage Outcomes
During the housing crisis, it came to be recognized that inflated home mortgage appraisals were widespread during the subprime boom. The New York State Attorney General’s office investigated this issue with respect to one particular lender and Fannie Mae and Freddie Mac. The investigation resulted in an agreement between the Attorney General’s office, the government-sponsored enterprises (GSEs), and the Federal Housing Finance Agency (the GSEs’ federal regulator) in 2008, in which the GSEs agreed to adopt the Home Valuation Code of Conduct (HVCC). Using unique data sets that contain both approved and nonapproved mortgage applications, this study provides an empirical examination of the impact of the HVCC on appraisal and mortgage outcomes. The results suggest that the HVCC has reduced the probability of inflated valuations and induced a significant increase in low appraisals. The HVCC also made it more difficult to obtain mortgages in the aftermath of the financial crisis.
In the wake of the financial crisis, regulators and policymakers questioned whether inherent conflicts of interests between lenders and appraisers compromised the accuracy of appraisals utilized before the housing crisis. In response, laws and regulations were enacted to address the conflict-of-interest issues in appraisals for residential mortgages. With significantly tightened regulations and the decline in housing prices in many areas, home valuations in some areas became undervalued and new mortgages became harder to obtain in the aftermath of the crisis.
Despite the controversial role of appraisers before and during the most recent housing crisis, there is a dearth of empirical research about the effects of regulatory changes since the crisis on appraisal outcomes 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 This study provides the first empirical examination of the impact of a major appraisal rule, the now-superseded Home Valuation Code of Conduct (HVCC), which was adopted in the middle of the housing crisis, on low appraisals and mortgage outcomes.