This article discusses the new Home Valuation Code of Conduct for appraisals which will affect mortgage loan brokers originating loans for sale to Freddie Mac or Fannie Mae.
UPDATE 07/30/2009: Fannie Mae and Freddie Mac, in response to the protests from real estate licensees and appraisers, issued an updated FAQ to clarify certain ambiguities, such as whether licensees may talk to appraisers once selected by the lender (Yes), and if the selected appraiser must have experience in the geographic area they have been asked to work (Yes). HR 3044 has also been introduced urging an 18-month moratorium on the HVCC. For more information, visit the updated Fannie Mae FAQ. [See
Restricted gatekeeper contact with real estate appraisers
New restrictions reduce or eliminate the contact allowed between mortgage loan brokers (MLBs) or transaction agents and real estate appraisers when an appraisal report is to be prepared for a loan to be purchased in the secondary mortgage market by Freddie Mac or Fannie Mae.
An MLB can no longer select, retain, or pay an appraiser for an appraisal report on a single-family home the lender plans to deliver to Freddie Mac or Fannie Mae. Lenders cannot accept an appraisal report “tainted” by the “touch” of an MLB. Appraisal reports must be certified by the lender as obtained in compliance with the Home Valuation Code of Conduct (HVCC) when Freddie Mac or Fannie Mae will purchase the loan. [HVCC §III(A)]
Exclusions from certification include FHA/VA, §184 Native American, and §502 Guaranteed Rural Housing mortgages. [Freddie Mac Publication Number 746, March 2009]
However, the HVCC only applies to loan origination appraisals, not to appraisals for foreclosure/REO processing, workouts, or any other loss mitigation activity. [Freddie Mac HVCC Q&A, Question 4]
The HVCC applies mostly to lender conduct in regards to appraisals and loan production, but it has a profoundly adverse and deliberately punitive effect on MLBs.
MLB contact with appraisers is a thing of the past
Traditionally, MLBs have cultivated “long-term, professional relationships with appraisers,” in their communities as noted by Bill Rayburn, the chief executive officer of FNC Inc., Oxford, Mississippi:
“This may have had nothing to do with the appraiser hitting the number. It may have had to do with great service. The broker orders a full appraisal. Because the broker gives [the appraiser] a lot of business and pays promptly, the appraiser gives the broker great service,” he says.
A broker with a good relationship with an appraiser is confident in receiving a complete appraisal that meets Fannie Mae and Freddie Mac requirements within a day or two, Rayburn adds. [McGarity, Mary. “A New Code of Conduct.” Mortgage Banking Magazine May 2009: 20.]
With a quality appraisal report in-hand that the MLB has confidence in, he would then deal with multiple lenders in order to try to place the loan with the lender with the best rates or programs.
The HVCC changes everything. Steve Haslam, chief executive officer of Streetlinks National Appraisal Services, Indianapolis states, “The whole broker world—which by latest estimates originates 50 percent of all loans—is now restricted from doing what they’ve done all along: working directly with appraisers.” [McGarity, 22]
Mortgage loan brokers will now need to choose a lender first, hindering the MLB’s ability to shop around at the time of closing to locate the best loan for his borrower. Upon initially settling on a lender, the MLB will then have to request that the lender or a third party through the lender, such as an appraisal management company (AMC), select an appraiser and obtain the report.
If the lender works with more than one AMC, the lender must select the AMC who will in turn select the appraiser. The mortgage broker cannot select from a list of approved AMCs, much less select an individual appraiser himself.
The effect of the HVCC is two-fold. One, an MLB will have no control over the selection of the appraiser. Thus, the MLB’s concern becomes the timeliness of service and the quality of the report from an unknown appraiser. Two, when a borrower decides not to go with the initial lender, the appraisal report is “portable” but the second lender will likely decide the report does not conform to its guidelines and that a new appraiser and report are needed. All this, of course, will be at additional cost to the borrower, including a surcharge profit the lender adds to the second fee.
The effects of no MLB control
The timeliness issue is straight forward. While an MLB has, in the past, depended on prompt service from a local appraiser he was well-acquainted with, Rayburn states, “it may be five days or even weeks before the broker gets an appraisal, and it may be from someone that they don’t know and don’t have any confidence in. That’s the broker’s concern.”
The quality issue when the lender chooses an AMC who in turn will select an appraiser is of greater concern to MLBs than if an independent individual appraiser is chosen. While lenders are not required to use an AMC to select an appraiser under the HVCC, that is unquestionably the easiest option for the lender to comply with the HVCC guidelines separating a lender’s in-house appraisal selection process from its loan production process.
The director of government and external relations for the Washington, D.C. office of the Appraisal Institute, Bill Garber, states:
“Management companies [(AMCs)] seek out appraisers who are willing to accept reductions in their market fees in exchange for volume guarantees and appraisal assignments…. There’s a concern that there’s too much emphasis being paid to the price of the appraisal, and not nearly enough on the competency of that appraiser and the appraisal itself. A lot of management companies populate with appraisers based primarily on whether they can accept a reduction in their fee, and not nearly enough on whether they’re producing quality work.”
The Appraisal Institute is concerned that if that trend continues, there will be a general decline in the quality of appraisals, he adds. “A lot of the experienced and well-trained individual appraisers are fleeing the mortgage appraisal business and [the positions are] being back-filled by the least-experienced folks.” [McGarity, 23-24]
With AMC’s traditionally taking a large cut of an affiliated appraiser’s fee in exchange for a volume guarantee, as Haslam argues, “You’re going to get a lower level of appraiser, [and] you’ll get it outsourced to a trainee or apprentice. This is where the quality issues come into play.” [McGarity, 24]
The issue of portability
The HVCC allows an appraisal report ordered out and obtained by one lender to be handed over to another lender on the request of the borrower, if:
- the lender receiving the report obtains written assurance from the original lender that the appraisal was obtained in compliance with the HVCC; and
- the receiving lender determines the appraisal report conforms to its further requirements and guidelines. [HVCC §III(A)]
However, the likelihood that the original lender will be in anyway motivated to set up the processes necessary to promptly transfer an appraisal report to a rival lender is slim. Even though a lender may go through the trouble of working out a manageable solution to transferring an appraisal report to another lender, the timeliness of this service is in doubt. A minor, but still additional, fee for this service will also likely be charged to the MLB or borrower. The issue of liability for the report’s failure to fully comply with the HVCC will definitely cut against the borrower’s ability to get the necessary conformance letter from the first lender.
Then consider the first lender’s appraisal report which does comply with the HVCC, but does not conform to the second lender’s own requirements and guidelines. This situation will require the request for a new appraisal to be ordered out by the second lender; a new charge to the borrower.
Thus, multiple fees for multiple transfers of reports or for new appraisals is a constant possibility as the MLB tries to look out for the best interests of his borrower while shopping around for the best loan at time of closing. Without this comparative advantage held by the MLB up until closing, the borrower is at the complete mercy of the lender not to alter loan terms at the time of closing, a natural tendency even with competition. As President Savitt of the National Association of Mortgage Brokers (NAMB) argues:
“The HVCC does nothing but drive up costs for consumers and push small businesses out of the market [and] will drastically reduce the ability of mortgage brokers to provide consumers with an efficient and cost-effective means of obtaining a mortgage.” [McGarity, 22]
The new reality
The HVCC only covers the conduct involved in the origination of single-family loans that will be sold to Freddie Mac and Fannie Mae. However, time will tell whether lenders, in order to streamline operations, will require all loans that come into their houses to comply with the HVCC so they can be sold in the secondary mortgage market.
If all loans are treated as produced to be able to be sold in the secondary mortgage market, then MLBs will be effectively stripped of authority to directly order an appraisal report from the appraiser of their choice for any borrower seeking a loan on an application that comes across their desks. A whole new world presenting major adjustments for experienced MLBs and appraisers alike, with the borrower having even less to say about the consequences.
Editor’s note—For more information on the HVCC, FAQs are available on both the Freddie Mac and Fannie Mae websites. [See www.freddiemac.com/singlefamily/hvcc_faq.html and www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/hvccfaqs.pdf]