Expert Appraiser: Trusts, Divorce, Property Tax

May 1, 2009: Immediate Changes Coming to the Mortgage and Lending Industry

Compiled by James Ebert, Appraiser (310)505-5916

I. Overview

II. Fannie Mae Freddie Mac & Mortgage Brokers

III. Small Bank Exemptions

IV. Two Articles

V. FAQ and Updates from Fannie, Freddie

VI. Mortgage Brokers File Suit to Block HVCC

I. Starting May 1, 2009, much of the conforming loan and mortgage process will be changing. Many mortgage brokers may be limited from this loan production. When implemented, to show they are not in collusion with appraisers, lenders will be required to send their appraisal requests to an intermediary, one of several Appraisal Management Companies. These companies, then, will assign the orders randomly to a wide field of appraisers, who may not be qualified to know the market. is process. See article below, stating “the HVCC bars appraisers from interacting at all with agents, mortgage brokers, loan officers, and others”

Many national lenders are actually implementing this process earlier, some are already using this process. There are exceptions, including small local banks, credit unions, and some other sources. But control of the mortgage industry will be consolidated and driven by the few big lenders left standing.

II. Fannie addresses Mortgage Brokers

Fannie addresses several questions regarding brokers and the appraisals under the HVCC:

When a lender uses an appraisal management company, the appraisal management company is responsible for retaining and paying the appraiser. Is it likewise permissible for a mortgage broker to use an appraisal management company, since the mortgage broker does not technically retain or pay the appraiser?
No. The Code prohibits lenders from relying on an appraisal where the broker had a role in selecting, retaining, or compensating the appraiser.

May a mortgage broker provide the lender with an approved appraiser list for the lender to use when ordering appraisals for that particular broker?
No.

May a mortgage broker order an appraisal directly from an appraisal management company that was specifically authorized by the lender?
No. The Code prohibits brokers from ordering appraisal services

III. The HVCC Exemptions to the Code

1. My institution is already required to comply with federal regulations regarding appraisals. Does this exempt my institution from the Code?
No. All Freddie Mac Sellers must comply with the Code, which has been added as an Exhibit to the Guide.

2. How do I know if my organization will be exempt from Section IV (a) of the Code as a “small bank?”
In general, to be exempt from Section IV (a) of the Code, according to Section IV (e) of the Code, a Seller must (1) meet the definition of a “small bank” as set forth in 12 U.S.C. Section 2908 (which currently provides, among other factors, that the institution’s aggregate assets are no more than $250,000,000) and (2) Freddie Mac determines that the Seller would suffer hardship due to the provisions. We will provide additional information on this topic in the future.

IV. Samples of articles about the process.

1. (HVCC) Home Valuation Code of Conduct and the End of the Independent Real Estate Appraiser
By Brian Quigley

Brian Quigley
Level: Basic PLUS

Working in finance since 2001, Brian got his start working for Investec Ernst and Company in Long Island, New York as a registered representative selling ... ...

The Home Valuation Code Of Conduct is based on the belief that real estate appraisers have universally been intimidated, coerced, bribed, etc, into coming up with a property valuation. Fannie Mae and Freddie Mac have agreed with the Attorney General of New York, to form an agreement that will not go to the Senate or House Committees. It states that the future of the appraisal business will be regulated by Fannie Mae and Freddie Mac when sponsoring the financing of the mortgage. There are many factors put into place that make this bill very unpopular with mortgage brokers, real estate agents, appraisers, and most of all, the end consumer.

Problems: It requires all appraisers to join Appraisal Management Companies, to which they are forced to pay 40% of their income, ending the existence of their lender relationships they have spend years fostering and preserving.

As mortgage brokers, we will be disabled from choosing the appraiser we want, and will not be allowed any contact with the appraiser, only the lender will be allowed to do that. If I wanted to use my appraiser because of his accuracy, research tools, professionalism,and speed, I would not be able to provide that value added service to my client. So if your lender chooses an appraiser with that is slow or backed up, you are stuck.

Since the appraisal will not be in the mortgage brokers name, you cannot have it reassigned. If your client needs to change a lender, or if the client does not fit into the guidelines at any time during the process, you will need to get a completely new appraisal, thus increasing your clients costs, delaying the loan closing, and making all parties involved extremely frustrated.

Fannie Mae and Freddie Mac have lost billions of dollars in the last few years, so it is no wonder they are enjoining this bill, since it will only help them manipulate the market, and have more control.

2. From Appraisal Scoop:

HVCC: The Cure Is Worse Than The Disease

by Dave Biggers

Dave Biggers is founder and Chairman of a la mode, an appraisal software company. An engineering and economics major, Dave started a la mode while still in school in 1985.

By now, you've heard a lot about the Home Valuation Code of Conduct (HVCC), which sprang out of a March 3, 2008 agreement reached between the Attorney General of New York (Andrew Cuomo), the OFHEO, and Fannie Mae and Freddie Mac. In the settlement, the parties resolved issues of appraisal coercion and independence in exchange for the Attorney General's office terminating its investigation. The agreement stated that the HVCC would be the standard of conduct followed by all parties, complemented and overseen by a newly formed Independent Valuation Protection Institute, or IVPI. The IVPI is to be funded jointly by Fannie and Freddie for a period of 28 months.

The HVCC and the agreement that spawned it, lead off with concern for sound appraisals produced free of any influence or coercion from lenders or other parties. But the devil is in the details. We believe the details create a misleading and dangerous environment for both borrowers and for appraisers.

Where it hands off responsibility to the IVPI and HVCC, things get muddy. The IVPI is poorly defined, and, considering its importance in the changes to the bedrock of the national real estate industry, there should be far more transparency in its makeup and mission. There's not much concrete information regarding the IVPI, the industry deserves detailed information immediately.

The HVCC is clear, but it strays from its stated intent. There are major aspects of the HVCC which cause concern. These issues are not the result of the last-minute agreement, but rather stem directly from intentional structuring. The HVCC was drafted by an as-yet-undisclosed group of industry participants, and the fingerprints indicate substantial AMC and lender influence in its language.

The aspects which harm the consumer and appraisal industry, are summarized as follows:

Under the HVCC, any lender using an appraiser incurs regulatory risks and additional costs, whereas AVMs, BPOs, and other valuation alternatives are exempted from the same regulations and liabilities. By singling out appraisers while exempting alternative valuation types, the HVCC creates a two-tier system of valuation with numerous loopholes, encouraging a lender to not use appraisers. A lender can pressure a BPO provider to "hit the number," or run multiple AVMs until a desired result is achieved. The last independent watchdog on the borrower's behalf in the real estate transaction - the appraiser - will be rendered irrelevant.

The language in the HVCC's sections VIII and XI in particular make it clear that the authors purposely marked distinctions between appraisals and other valuation products, and lenders are thereby encouraged to utilize the unregulated and unrestricted alternative valuation methods. This runs contrary to the clearly stated goals of the parent document, the settlement agreement establishing the HVCC.

The HVCC restricts the appraiser from operating in the same manner as the other parties in the transaction. First, the HVCC mandates that all appraisal orders must be placed through AMCs, which deprives independent fee appraisers of nearly half of their normal fees, and which will not result in greater independence from coercion. (This massive push toward AMCs is all the more surprising given that the original lawsuit by the Attorney General was filed against eAppraiseIT, an AMC, accused of inflating WaMu’s appraisal demands.) The HVCC reduces competition to a handful of national appraisal management companies, acting in complete contravention to existing federal and state laws regarding anti-competitive behavior in consumer transactions.

Additionally the HVCC bars appraisers from interacting at all with agents, mortgage brokers, loan officers, and others. Preventing appraisers from interacting with clients as part of the normal course of business is a "death sentence" restriction not imposed on any other provider under RESPA. RESPA encourages competition between and interaction of the many parties involved in a real estate transaction, so long as disclosures are made and influence is eliminated.

The anti-coercion measures alone - if properly applied to all valuations - will protect the public from the influence of pressure, whether from lenders, management companies, mortgage brokers, real estate agents, or others. If all parties in the transaction were licensed/governed, including mortgage brokers, then the problem of influence is handled and the appraisal market can operate in a competitive, free market manner, protected from coercion, collusion, and abuse.

If left unchanged in the HVCC, instead of strengthening the appraisals as collateral valuation, the opposite will ensue as experienced appraisers leave the profession. Their business relationships gleaned over decades will be made worthless, and they will see 40% or more of their fees handed over to AMCs. No other RESPA entity is forced to suffer such an egregious restriction, especially the originators who engaged in the coercion in the first place.

Appraisers suggest that lenders must be prohibited from owning or controlling any valuation entity or mechanism used in the origination of a loan. Under the HVCC lenders can own up to 20% of a management company, and they can own 100% of an AVM, BPO, or other valuation provider. Lenders are expressly allowed to "develop, deploy, and use internal automated valuation models," with no restrictions on control of the ordering process.

Valuations reports of a property are not required to be released to the borrower, unless it is an appraisal. Under this format, a lender could first order a BPO or AVM (possibly under their control), and if unhappy with the value, continue to order additional valuations (along with specific instructions as to the value needed), until the desired value is reached.

The reporting, investigation, and enforcement mechanisms in the current HVCC are solely managed by the lender, which makes the lender responsible for its own regulatory oversight and places the lender in control of the regulation of the appraiser. It's the classic "fox guarding the henhouse" scenario.

The HVCC further mandates in section IX that any lender with a "reasonable basis" to believe an appraiser has engaged in wrongdoing must report such to the IVPI and to the state appraisal regulatory bodies, without providing in reverse an independent mechanism for the appraiser to report coercion. Appraisers and anyone else in the transaction must have a similar mandate and reciprocal method to report lenders who influence the valuation process. Again, the IVPI is the appropriate manager of the process.

The original intent of the agreement which spawned the HVCC was to strengthen the independence and reliability of the valuations backing what is the single largest source of their net worth. However, a regulation which damages and circumvents the very industry it seeks to protect - and which in turn harms consumers and investors - will not get us as a nation any closer to that goal.

V. Freddie, Fannie issue HVCC FAQ documents

VI.

February 25, 2009 NAMB Files Lawsuit Over Controversial Home Valuation Code of Conduct (HVCC)

McLean, VA – The National Association of Mortgage Brokers (NAMB), with the support of Baker & Hostetler LLP, filed a lawsuit today with the United States District Court for the District of Columbia against the Federal Housing Finance Agency (FHFA) Director James B. Lockhart over the controversial Home Valuation Code of Conduct (HVCC) included in the appraisal agreements between the FHFA, Fannie Mae and Freddie Mac (GSEs), and New York Attorney General Andrew Cuomo.

“The HVCC does nothing but drive up costs for consumers and push small businesses out of the market,” said NAMB President, Marc Savitt. “The HVCC will drastically reduce the ability of mortgage brokers to provide consumers with an efficient and cost-effective means of obtaining a mortgage.”

NAMB strongly supports policy initiatives that seek to ban coercion of appraisers. However, NAMB believes it is critical for mortgage and real estate professionals to maintain an appropriate level of contact with appraisers to ensure appraisal quality and independence. NAMB argues the HVCC is a “de facto” regulation and holds the FHFA in violation of the Administrative Procedures Act of 1992. The HVCC is arbitrary and capricious, contrary to the intent of Congress and in direct conflict with regulations, policies and guidelines regarding appraisal standards already issued.

“Despite strong opposition by numerous industry representatives, the FHFA, GSEs and New York Attorney General fail to consider the unavoidable increase in costs to consumers should the agreements take effect,” said Savitt. “The lawsuit is the only remaining option to protect small businesses mortgage professionals from the severe competitive disadvantages caused by the agreement. The agreements will also have significant negative consequences for consumers.”

For a copy of the lawsuit, please click here.

The National Association of Mortgage Brokers is the voice of the mortgage broker industry, representing the interests of mortgage brokers and homebuyers since 1973. The Association is committed to promoting the highest degree of professionalism and ethical standards for its members. In addition to mandating members adhere to a professional code of ethics, NAMB provides mortgage brokers with professional education opportunities, and offers rigorous certification programs to recognize members with the highest levels of professional knowledge and education.

VII. Actual HVCC as of December 23, 2008

Home Valuation Code of Conduct

I. Appraiser Independence Safeguards

A. An “appraiser” must be, at a minimum, licensed or certified by the state in which the property to be appraised is located.

B. No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal company, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, inducement, intimidation, bribery, or in any other manner including but not limited to:

(1) withholding or threatening to withhold timely payment or partial payment for an appraisal report;

(2) withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser;

(3) expressly or impliedly promising future business, promotions, or increased compensation for an appraiser;

(4) conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary value estimate requested from an appraiser;

(5) requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report prior to the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report;

(6) providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided;

(7) providing to an appraiser, appraisal company, appraisal management company, or any entity or person related to the appraiser, appraisal company, or appraisal management company, stock or other financial or non-financial benefits;

(8) allowing the removal of an appraiser from a list of qualified appraisers, or the addition of an appraiser to an exclusionary list of disapproved appraisers, used by any entity, without prompt written notice to such appraiser, which notice shall include written evidence of the appraiser’s illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP) or state licensing standards, substandard performance, improper or unprofessional behavior or other substantive reason for removal (except that this prohibition will not preclude the management of appraiser lists for bona fide administrative reasons based on written, management-approved policies);

(9) ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model (AVM) in connection with a mortgage financing transaction unless: (i) there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or (ii) unless such appraisal or automated valuation model is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control process or underwriting guidelines, and so long as the lender adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value; or

(10) any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality or violates law or regulation, including, but not limited to, the Truth in Lending Act (TILA) and Regulation Z, or the USPAP.

C. Nothing in this section shall be construed as prohibiting the lender (or any third party acting on behalf of the lender) from requesting that an appraiser (i) provide additional information or explanation about the basis for a valuation, or (ii) correct objective factual errors in an appraisal report.

II. Borrower Receipt of Appraisal

The lender shall ensure that the borrower is provided a copy of any appraisal report concerning the borrower’s subject property promptly upon completion at no additional cost to the borrower, and in any event no less than three days prior to the closing of the loan. The borrower may waive this three-day requirement. The lender may require the borrower to reimburse the lender for the cost of the appraisal.

III. Appraiser Engagement

A. The lender or any third party specifically authorized by the lender (including, but not limited to, appraisal companies, appraisal management companies, and correspondent lenders) shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser. The lender will not accept any appraisal report completed by an appraiser selected, retained, or compensated in any manner by any other third party (including mortgage brokers and real estate agents). The lender may accept an appraisal prepared by an appraiser for a different lender, including where a mortgage broker has facilitated the mortgage application (but not ordered the appraisal), provided the lender: (1) obtains written assurances that such other lender follows this Code of Conduct in connection with the loan being originated; and (2) determines that such appraisal conforms to its requirements for appraisals and is otherwise acceptable.

B. All members of the lender’s 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 not independent of the loan production staff and process, shall be forbidden from (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 or forbidden from performing such work; and (2) having any substantive communications with an appraiser or appraisal management company relating to or having an impact on valuation, including ordering or managing an appraisal assignment. If absolute lines of independence cannot be achieved as a result of the lender’s small size and limited staff, the lender must be able to clearly demonstrate that it has prudent safeguards to isolate its collateral evaluation process from influence or interference from its loan production process.

C. Any employee of the lender (or if the lender retains an appraisal company or appraisal management company, any employee of that company) tasked with selecting appraisers for an approved panel or substantive appraisal review must be (1) appropriately trained and qualified in the area of real estate appraisals, and (2) in the case of an employee of the lender, wholly independent of the loan production staff and process.

IV. Prevention of Improper Influences on Appraisers

A. In underwriting a loan, the lender shall not utilize any appraisal report:

(1) prepared by an appraiser employed by:

(a) the lender;

(b) an affiliate of the lender;

(c) an entity that is owned, in whole or in part, by the lender; or

(d) an entity that owns, in whole or in part, the lender.

(2) prepared by an appraiser

(a) employed,

(b) engaged as an independent contractor, or

(c) otherwise retained by

any appraisal company or any appraisal management company affiliated with, or that owns or is owned, in whole or in part by, the lender or an affiliate of the lender.

B. Section IV.A. shall apply unless:

(1) the appraiser or, if an affiliate, the company for which the appraiser works, reports to a function of the lender independent of sales or loan production;

(2) employees in the sales or loan production functions of the lender have no involvement in the operations of the appraisal functions and play no role in selecting, retaining, recommending, or influencing the selection of any appraiser for any particular appraisal assignment or for inclusion on a list or panel of appraisers approved to perform appraisals for the lender or forbidden from performing such work;

(3) employees in the sales or loan production functions of the lender are not allowed to have any substantive communications with an appraiser, appraisal company, or appraisal management company relating to or having an impact on valuation or to be provided information about which appraiser has been given a particular appraisal assignment before completion of that assignment;

(4) the lender, or its agents, and any appraisal company or appraisal management company providing the appraisal to the lender do not provide the appraiser any estimated or target value of the property or the loan amount applied for (except that a copy of the sales contract for purchase transactions may be provided);

(5) the appraiser's compensation does not depend in any way on the value arrived at in any appraisal or upon the closing of the loan for which the appraisal was completed;

(6) the lender and any appraisal company or any appraisal management company providing the appraisal to the lender has adopted written policies and procedures implementing this Code of Conduct, including, but not limited to, adequate training and disciplinary rules on appraiser independence (including the principles detailed in Part I of this Code of Conduct) and has mechanisms in place to report and discipline anyone who violates these policies and procedures;

(7) the lender’s appraisal functions are either annually audited by an external auditor or are subject to federal or state regulatory examination, and, unless prohibited by law, the lender promptly provides to Fannie Mae or Freddie Mac the results of any adverse, negative, or irregular findings of such audits and examinations indicating non-compliance with any provision of this Code of Conduct, whether or not the examination was conducted for the purpose of determining compliance with this Code of Conduct; and

(8) the lender and any entity described in section IV.A. providing the appraisal to the lender recognize that, once the Independent Valuation Protection Institute is established, the Institute will receive complaints for review and referral regarding non-compliance with the Code of Conduct. Referrals and reports shall be made to Fannie Mae and/or Freddie Mac regarding such complaints and the Institute will provide information on the results of complaint reviews to Fannie Mae and/or Freddie Mac and make them available to the other parties to the Home Value Protection Program and Cooperation Agreement.

C. In underwriting a loan, the lender shall not use an appraisal report prepared by an entity that is affiliated with, or that owns or is owned, in whole or in part by, another entity that is engaged by the lender to provide other settlement services, as that term is defined in the Real Estate Settlement Procedures Act, 12 U.S.C.§ 2601 et seq., for the same transaction, unless the entity that provides the appraisal:

(1) has adopted written policies and procedures implementing this Code of Conduct, including, but not limited to, adequate training and disciplinary rules on appraiser independence (including the principles detailed in this Code of Conduct) and has mechanisms in place to report and discipline anyone who violates these policies and procedures;

(2) recognizes that, once the Independent Valuation Protection Institute is established, the Institute will receive complaints for review and referral regarding non-compliance with the Code of Conduct. Referrals and reports shall be made to Fannie Mae and/or Freddie Mac regarding such complaints and the Institute will provide information on the results of its review of such complaints to Fannie Mae and/or Freddie Mac and make them available to the other parties to the Home Value Protection Program and Cooperation Agreement.

D. Notwithstanding the requirements herein, the lender also may use in-house staff appraisers to (i) order appraisals, (ii) conduct appraisal reviews or other quality control, whether pre-funding or post-funding, (iii) develop, deploy, or use internal automated valuation models, or (iv) prepare appraisals in connection with transactions other than mortgage origination transactions (e.g. loan workouts), if it complies with the terms of this Code of Conduct.

E. The provisions of this section do not apply to institutions (including non-banking institutions) that meet the definition of a “small bank” as set forth in 12 U.S.C. § 2908, and which Freddie Mae or Fannie Mae determines would suffer hardship due to the provisions, and which otherwise adhere to this Code of Conduct.

V. The Independent Valuation Protection Institute

An Independent Valuation Protection Institute (Institute) shall be created as approved by the parties. Subject to section IX, when the Institute is established, the lender will provide information to appraisers and borrowers regarding the availability of the Institute's services, which are expected to include: (1) a telephone hotline and email address to receive any complaints of Code of Conduct non-compliance, including complaints from appraisers, individuals, or other entities concerning the improper influencing or attempted improper influencing of appraisers or the appraisal process, which the Institute will review and report as provided in IV.B(8) and IV.C(2) of this Code of Conduct; and (2) the publication and promotion of best practices for independent valuation. The lender shall not retaliate, in any manner or method, against the person or entity that makes a complaint to the Institute.

VI. Appraisal Quality Control Testing

The lender agrees that it shall quality control test, by use of retroactive or additional appraisal reports or other appropriate method, a randomly selected 10 percent (or other bona fide statistically significant percentage) of the appraisals or valuations that are used by the lender, including the results of automated valuation models, broker’s price opinions, or “desktop” evaluations. The lender shall provide to Fannie Mae or Freddie Mac a report of any adverse, negative, or irregular findings of such quality control testing, and any findings indicating non-compliance with any provision of this Code of Conduct, with respect to loans sold to Fannie Mae and Freddie Mac respectively, and the Enterprise may enforce all applicable rights and remedies, including requiring the lender to repurchase mortgages or the Enterprise’s participation interest in mortgages.

VII. Referrals of Appraisal Misconduct Reports

Any lender that has a reasonable basis to believe an appraiser or appraisal management company is violating applicable laws, or is otherwise engaging in unethical conduct, shall promptly refer the matter to the applicable State appraiser certifying and licensing agency or other relevant regulatory bodies.

VIII. Representations and Warranties

A lender shall certify, warrant, and represent that the appraisal report was obtained in a manner in compliance with this Code of Conduct. If the Enterprise determines, on its own or from a referral made by the Institute, that a lender is in breach of a material aspect of this Code of Conduct or in violation of a provision of the Code by a complaint referred from the Institute, the Enterprise will enforce all applicable rights and remedies, including suspension or termination of the lender’s eligibility to sell loans to the Enterprise, if the lender fails to remediate.

IX. Scope of Code

Nothing in this Code of Conduct shall be construed to establish new requirements or obligations that: (1) require a lender to obtain a property valuation, or to use any particular method for property valuation (such as an appraisal or automated valuation model) in connection with any mortgage loan or mortgage financing transaction; (2) affect the acceptable scope of work for an appraiser in connection with a particular assignment; or (3) require the lender or any third party acting on behalf of the lender to take any action prohibited by federal or state law or regulation.