The Home Valuation Code of Conduct

By Phillip C. Querin

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:

  • Currently, the Code only applies to loans purchased by Fannie Mae and Freddie Mac. It does not apply to FHA or VA loans, nor does it apply to appraisals performed for loss mitigation purposes.
  • The Code applies only to 1- to 4-unit single-family loans. Interestingly, it does not apply to Fannie Mae’s own investments in mortgage-related securities. There is no explanation as to why appraiser independence is less important in its own securities.
  • It requires that lenders have written policies and procedures implementing the Code, which include rules on appraiser independence and certain protocols in place for reporting anyone who violates them.
  • Although it does not directly prohibit a lender from ordering a second appraisal, it does prohibit a lender from ordering a second appraisal if doing so is an attempt to influence the outcome of the first appraisal.
  • The Code does not specifically prohibit communication with an appraiser by a real estate agent for clarification or correction purposes. However, agents should be careful not to do so in a way that could be construed as attempting to improperly “influence” the appraiser’s opinion of value.
  • As discussed later, there is much fear – and some anecdotal evidence – to suggest that one of the unintended consequences of the Code is due to Appraisal Management Companies (discussed below) selecting out-of-area and less experienced appraisers, who may know far less about the subject property than the real estate agent involved in the sale.
  • The lender is required to provide a copy of the appraisal to the borrower promptly upon its completion, but in no event later than three business days before closing.
  • The Code prohibits an appraiser from receiving payment directly from the borrower. It is exclusively up to the lender or its designee to provide for compensation to the appraiser.
  • The lenders “loan production staff,” as well as any person “…(i) who is compensated on a commission basis upon the successful completion of a loan or (ii) who reports, ultimately, to any officer of the lender (other than designated counsel or officers)” are prohibited from doing any of the following: “(1) selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assignment or for inclusion on a list or panel of appraisers approved to perform appraisals for the lender; (2) (having) any communications with an appraiser, including ordering or managing an appraisal assignment; and (3) working together in the same organizational unit, or being directly supervised by the same manager, as any person who is involved in the selection, retention, recommendation of, or communication with any appraiser.” Inexplicably, the term “loan production staff” is not defined in the Code. However, FNMA has stated that “(t)his would include an employee whose compensation is based on loan volume or the closing of a loan transaction. Employees responsible for the credit administration function or credit risk management are not considered loan production staff.”4
  • Neither Fannie nor Freddie will be required to monitor Code compliance. Rather, this is expected to be a part of the lender’s responsibility. There is a “small bank” exception if it is determined that the institution would suffer an undue hardship in the compliance process.
  • Lenders may use a pre-approved appraiser list or panel in the selection of a residential appraiser, so long as (1) the lender’s employees responsible for the selection are independent of the “loan production staff”, and (2) the “loan production staff” is not involved in the selection or job assignment process.
  • Perhaps one of the most criticized provisions of the Code is how it deals with Appraisal Management Companies (“AMCs”). Contrary to some reports, the Code does not require that lenders use AMCs for ordering appraisals. It is permissible to order appraisals directly from an individual appraiser. However, it permits AMCs affiliated with, or owned by the lender, to order appraisals so long as they are totally independent of the lender’s (undefined) “loan production staff.” This exception allowing for appointment of an appraiser from a lender-owned AMC is an example of form over substance, and simply encourages lenders to create their own AMCs – if they don’t already have one. Regardless of semantics, an appraiser employed by a lender-owned AMC cannot truly be “independent” – at least as people outside of government and politics understand the word. So much for “firewalls.”
  • Equally surprising is the fact that although a mortgage broker may not independently select an appraiser (or have any direct involvement in the appraisal process), the Code permits the lender to direct a mortgage broker to a specifically authorized AMC “…as long as the lender has previously arranged for its appraisal process to be managed by the specifically authorized AMC. This process complies with the Code because the broker is not responsible for selecting, retaining, or providing for payment of compensation to the appraiser.”5 The problem with this approach is that it now invites the broker to select lenders based upon the appraisers in the lender-owned AMC. In fact, according to FNMA’s interpretation of the Code, it is permissible for lenders to use their web portal through which the broker may order an appraisal using the lender’s selected AMC.6
  • So while the Code is quite clear that the mortgage broker may have no independent involvement in the appraisal selection process, including any appraiser contact, it does permit the lender (e.g. the loan underwriter) to have such contact (e.g. for clarification or correction of an error) so long as there is no effort to influence the appraiser’s opinion of value.

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.


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.

8HR 3044.

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.