- Home Valuation Code of Conduct
- July 27, 2010 | Author: Eric S. Anderson
- Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
In March 2008, New York Attorney General Andrew Cuomo entered into a settlement agreement (the Cuomo Agreement) with Fannie Mae and Freddie Mac (both government-sponsored enterprises, or GSEs), with the approval of the Office of Federal Housing Enterprise Oversight, to establish a Home Valuation Code of Conduct (HVCC) to govern the preparation of appraisals in connection with residential mortgage loans purchased by the GSEs. The Cuomo Agreement provided for the implementation of the HVCC on January 1, 2009, but expressly asked for comment and concurrence to its terms and timetable from the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, and the Federal Housing Administration. The Cuomo Agreement is discussed in the September 2008 issue of this publication.
The HVCC as set forth in the Cuomo Agreement disallowed any employee, director, officer, or agent of a lender, including various third parties with contractual relationships with the lender, from influencing the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or any other manner. More specifically, the proposed HVCC prohibited many uses of in-house appraisers and any use of appraisal companies that the lender controls or owns, unless the lender’s ownership interest is less than 20 percent and the lender has no involvement in the day-to-day operations or the selection of appraisers. Further, the proposed HVCC prohibited the lender’s loan production staff from having any role in the selection of appraisers, communications with appraisers, or even working in the same organizational unit with personnel that select or communicate with appraisers. If isolating the loan production staff in a separate unit is not possible by reason of the size of the organization, the lender would still be required to demonstrate that it has safeguards to isolate the appraisal process from the loan production process. However, the lender or a third party selected by the lender (and specifically not any mortgage broker or real estate agent) is required to select, retain, and pay the appraiser. Lenders were required to establish a hotline to receive complaints regarding improper influence of appraisers, and to perform quality control tests on 10 percent of the appraisals they use.
In the end, the HVCC did not become effective until May 1, 2009. In response to comments and upon further review, the HVCC was modified prior to becoming effective as follows:
- Lenders are allowed to accept appraisals ordered by other lenders, provided that the original lender complied with the HVCC.
- Lenders are allowed to rely on in-house appraisals, subject to a long list of requirements intended to separate the appraisal function from the sales or loan production function within the lender organization.
- Lenders are permitted to use an appraisal management company affiliated with the lender, so long as the appraisal management company adopts written policies and procedures implementing the HVCC.
- Lenders are required to report to the GSEs any adverse, negative, or irregular findings related to appraisal reviews conducted as part of their quality control testing of appraisals.
A significant result of the requirement that lenders, and not mortgage brokers, engage appraisers is that many (if not most) appraisals end up being ordered by an appraisal management company (AMC). Appraisers must be familiar with the local market in which properties they are valuing are located. Most lenders are not capable or willing to maintain lists of qualified appraisers throughout the country and therefore delegate that role to AMCs. Use of AMCs is not required by the HVCC, but an increased use of AMCs is the practical result.
The HVCC has gathered many critics. Appraisers claim that increased use of AMCs results in selection of the lowest cost rather than the most qualified appraisers, and is putting reputable appraisers out of business. Real estate groups contend that the AMCs tend to increase their profit margins by hiring appraisers as cheaply as possible, resulting in hiring of appraisers with inadequate experience, who may overly rely on distressed sales as comparables, further weakening the housing market. AMCs deny such charges, and contend that it is just good business for them to demand more for less. Consumer groups contend that the shift to AMCs has resulted in the average cost of appraisals increasing, rather than going down. Appraisers contend that the AMCs take too large a cut of the borrower’s appraisal dollars, leaving too little for the appraisers. Others contend that the HVCC is not having the intended effect of reducing the pressure on appraisers to inflate values, and that lenders still indirectly pressure appraisers to value properties to support proposed loans. Real estate groups have called for an 18-month suspension of the HVCC to relieve perceived downward pressure on the residential real estate market, and the proposed legislation establishing a Consumer Financial Protection Agency contains a provision that would sunset the HVCC. As of this writing, neither the 18-month moratorium on enforcement of the HVCC nor the sunset provision has been enacted.
The GSEs have responded with some additional clarification of the intent of the HVCC. They have clarified for mortgage lenders that appraisers must have experience in the geographic areas where they get assignments and that appraisers are not barred from talking with real estate agents. They have advised that the HVCC does not require that appraisers select distressed properties as comparable sales, a position supported by the Appraisal Institute. Although the HVCC applies only to loans purchased by the GSEs, the FHA has similar (but not identical) appraisal guidelines that it reportedly plans to align more closely with the HVCC.
Despite the criticisms aimed at the HVCC from many directions, the HVCC has so far survived the assault. As of May 1, 2009, all lenders making loans intended for sale to Fannie Mae or Freddie Mac must comply with the HVCC.