The Home Valuation Code of Conduct
Generally. Effective on May 1, 2009 the Home Valuation Code of Conduct, sometimes referred to as the “HVCC,” went into effect. Its creation was an effort to deal with the credit crisis, sparked, in part1, by the lax or non-existent underwriting that occurred with subprime and Alt-A lending during the credit heydays. This code sets forth certain mandatory appraisal-related practices that lenders must follow for all loans if they are to sell these loans to Fannie Mae or Freddie Mac. Underscoring the government’s rush to create more new rules to enhance accountability is the fact that the Code established the Independent Valuation Protection Institute (“IVPI”) for appraisers and consumers to report any improper conduct to influence an appraisal. It calls for the establishment of a “hotline” and e-mail address for lenders to provide their appraisers and borrowers in order to facilitate this reporting process so that IVPI can investigate. The only problem is that IVPI, by the government’s own admission, does not yet exist.2 One must wonder whether Fannie and Freddie would have ever agreed to the creation of the HVCC but for the fact that it is now effectively owned and controlled by the federal government.
The Specifics. There is much mistaken and erroneous information floating around the Realtor®, appraisal, and mortgage brokerage industries about the Code of Conduct. This is in large part due to the concern that it is resulting about its potential negative impact on the pocketbooks of all providers involved in any aspect of residential sales and lending.
In its simplest terms, the Code seeks to impose a “firewall” between the lender or mortgage broker, on the one hand, and the appraiser, on the other. The purpose is to assure appraiser independence, free of the undue influence of third parties. The industry most negatively impacted by implementation of the Code is the mortgage brokers, many of whom have established relationships with appraisers and appraisal companies. Accordingly, one of the Code’s primary aims is to prevent the threat that mortgage brokers (whose commission-driven income depends upon a successful appraisal) will exert undue influence on the appraiser (whose income is fee-based). As a result, the Code explicitly prohibits mortgage brokers (and certain others) from selecting, contacting, or paying appraisers involved in loans acquired by Fannie or Freddie. What follows are some highlights of the Code that are designed to accomplish these goals3:
The Problem With AMCs. Although AMCs have existed for some time, they do not seem to have been the recipients of Realtor® and appraiser concern until the Code was adopted nationwide.7 In short, the work of some AMC appraisers has been criticized for being faulty. The criticism relates to inexperienced and out-of-area appraisers and AMCs unfamiliar with the subject area. Thus, the argument goes, only the hungrier, less qualified and less experienced appraisers will work for AMCs. Realtors® have complained about lost sales from under-valued appraisals performed by incompetent and harried appraisers who are expected by their AMC to give immediate turn-around service, sacrificing quality for speed. A related complaint is that these appraisers, in an effort to quickly find market data comps, are relying too heavily on distressed sales information when appraising non- distressed sales transactions. Additionally, since the Code went into effect, there have been reports of an increasing number of lenders relying on AMCs for their appraisals.
The National Association of Realtors® has lobbied for an 18-month moratorium before implementation of the Code. Rep. Travis Childers, D-Miss. and Gary Miller D-Calif. have recently sponsored a bill to do so.8 One must ask whether the Code is even necessary. Most, if not all states already have their own appraisal licensing statutes and administrative rules that adopt the USPAP guidelines.9 RESPA, the federal Truth-in-Lending Act, and Regulation Z, also provide significant consumer protection provisions. It has always been illegal on several different levels to attempt to improperly influence the outcome of a real property appraisal. In short, is there anything imposed by the Code that is actually new – besides, of course, the nonexistent Independent Valuation Protection Institute? Perhaps existing laws should be enforced before we impose another layer of bureaucratic regulation at taxpayer expense.
Conclusion. Based upon the above, it is probably fair to ask: (a) What “settlement service” does the AMC actually provide – it certainly isn’t the appraisal itself, and (b) if only a portion of the total fee is paid for the actual appraisal and the rest is a kickback for the right to be on the AMC panel, why is it not separately broken out as such on the Good Faith Estimate and HUD-1? NAR’s request for an 18-month moratorium before implementation of the Home Valuation Code of Conduct is a good one. During that time we could determine if it actually accomplishes its stated goal of more transparency for the consumer in the lending process.
© 2010 QUERIN LAW, LLC
1There were many reasons for the credit crisis, and there is enough blame to spread around to almost all settlement service providers, including the lenders themselves. However, it is the appraisers and mortgage brokers that are the primary targets of the HVCC.
2See, FNMA Home Valuation Code of Conduct Frequently Asked Questions, No. 55, March, 2009.
3This is a summary only, and not intended to be exhaustive. Appraisal quality control requirements are not addressed. For specifics, consult the HVCC directly.
4See, FNMA Home Valuation Code of Conduct Frequently Asked Questions, No. 16, March, 2009.
5See, FNMA Home Valuation Code of Conduct Frequently Asked Questions, No. 37, March, 2009.
6See, FNMA Home Valuation Code of Conduct Frequently Asked Questions, No. 40, March, 2009.
7An earlier version of the Code was created and adopted as part of a settlement between the Office of Federal Housing Enterprise Oversight (“OFHEO”), which regulated Fannie and Freddie at the time, and the New York Attorney General’s office in March, 2008. The settlement was then modified and expanded to apply nationwide for all loans delivered to both entities. Today, OFHEO has been replaced by the Federal Housing Finance Agency (“FHFA”), which now regulates Fannie and Freddie.
9Uniform Standards of Professional Appraisal Practice. A set of standards created by the Appraisal Foundation and required to be followed for property appraisals. They set out, among other things, standards of practice for appraisers and are required by the Code itself. Interestingly (for those who remember the S&L crises of the 1980s), the Appraisal Foundation was an outgrowth of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) which came about to also address, appraiser independence. So history now seems to be repeating itself, both in financial abuses and governmental regulation.