What Now?

I sit in my office this Friday afternoon, listening to the traffic go by through the open windows, while I wait to drive over to the title company to close a purchase loan for two of the best borrowers I have ever worked with.  The purchasers, who were well qualified--were also extremely pleasant and agreeable through the loan process.  The appraisal came in higher than the sales price.  The lender asked for reasonable conditions and cleared them quickly. The documents came in time for both the first and second lien; and we are scheduled to close and fund today on the final day of our contract.  It was a dream transaction--the kind that rarely occurs any more but that helps me remember why I have chosen mortgage origination as a profession for the past thirteen years.

It seems strange then, today, to know that in less than 2 weeks, mortgage origination as we know it today will change radically.  Some lenders are actually implementing the new rules early, so loans that are being originated under the current standards will have to be locked by Friday, March 25.  How incredible to think that we are only 7 days away from the biggest shift that our industry has experienced during my career.

After days of hearing about filed law suits, requests for injunctions, letters from Senators, and letters from various Congressmen, we are now only days away from implementation of the FRB new rule on loan originator compensation and, as was the case with RESPA reform in January of 2010, it is starting to look as though the cavalry is not going to show up to save us. None of the efforts to delay the rule appear to have made any headway whatsoever, and now we are all left with the question, "What now?"

This week I had an interesting email exchange with a reader from California who is disillusioned with the efforts to influence our elected representatives and disheartened by the complete lack of support for our industry.  He raises some very good points in drawing analogies between our situation as loan originators and the mandates imposed on the appraisers by HVCC.  And he notes that the independent loan originator is being squeezed out of the industry--we handle roughly 10% of the mortgage originations today as opposed to about 65% five years ago.  "What I can't quite get, and maybe it's just me, is how the Fed has the authority to impose this draconian ruling on an entire industry."  Finally my email pen pal points out that if the government can impose these restrictions on our industry, what is to stop the micro management of any other industry?  What is to stop the government from regulating the compensation of people in all walks of life?

I thought that this email raised such good points that I have spent several days thinking about it.  The reader is looking for a way to stop the implementation of the Fed Rule in two weeks.  All of us would like to see that.  But if we are not successful in doing that, as it appears that we will not be, then what?

I believe that the only solution to this situation is to repeal Dodd Frank.  That may seem like an unattainable goal, but it isn't.  Remember that Michele Bachmann has already introduced a bill to repeal Dodd Frank.  That was largely a token gesture with no support, but it shows that a bill can be introduced.  The problem is that there is no support for repeal.  And that is largely our own fault.

Our combined industries of real estate services--appraisals, loan origination, title services, and real estate services--contributed in a large way to the huge economic boom that this country experienced in the last decade.  We made the American Dream of Homeownership possible for millions of people.  But the media and special interests turned us into villains and we allowed them to.  Rather than touting the good things that we had accomplished for the country, we focused on "the bad actors" who needed to get out of the industry.  And we wasted time lobbying politicians who despised us.  At the beginning of 2008, I had an opportunity to go meet with El Paso Congressman Sylvestre Reyes.  This meeting was made possible by the fact that I had recently assisted one of his aides in the purchase of his first home.  The aide set up the meeting so that I could discuss my concerns about the types of regulation being drafted, but the Congressman did not show up. Instead, he sent a second aide, who listened to my concerns and then smirked as he told me that "there are definitely going to be reforms."  I knew right then that I had wasted my time.  Sending emails and letters to people whose minds are closed is a waste of ink and the time that it takes to put our thoughts on paper.

But that is not to say that there is nothing we can do.  We can be our own advocates, since no one will advocate for us. Who is better qualified than us to tell our communities the truth about why their house values are dropping or to explain to the despondent home owner why he can't sell his house? I am amazed when I meet consumers who ask me how long I think it will be before financing returns to "normal".  So many people believe that the current tightening of lending standards is just an overreaction to the loose lending guidelines of the past and in a few years balance will return.  When I get to talk to these borrowers, I tell them that this is not just lenders being strict--the stringent new guidelines are codified into law and they will remain tough as long as the law does.

Nationally there has been a lot of support for amending or repealing the health care law.  The Dodd-Frank bill, which will easily have consequences as sweeping as Obama Care, has been barely mentioned at all.  Why?  Because many Americans believe that Obama Care will impact on their lives negatively, whereas most Americans don't appear to believe that Dodd Frank impacts their lives at all.  Most people seem to think that Dodd Frank affects only "greedy rich people".  They do not know or care that it is costing thousands of small business owners their businesses, that it will affect home values nationwide, that it will ultimately impact on every American who wants to buy or sell their home from now on.

But we can help to change that perception by telling the truth whenever and wherever we get the opportunity. The next time you are talking to your neighbor who is complaining that he is so underwater in his mortgage that he could go deep sea fishing, don't just sympathize.  Tell him that property values are going to keep dropping as long as housing financing is almost non existent and as long as appraisers are forced to work for appraisal management companies.  And when your family member or friend complains that he cannot get any service at the bank or that his loan application has been denied, let him know that this is why we need choices in financing.

My reader said that he does not want our industry be "Don Quixotic."  And I certainly don't want that either--Don Quixote never accomplished anything!  But a consistent, on point, honest message about the real reason that things are not improving in the housing industry can make a geniune impact. 

As bad as everything seems today, we will probably all still be alive in two years.  The only message politicians remember is the one they receive at the ballot box, so exercise your right to vote and find out where your representative stands (and has stood) on Dodd Frank and financial reform.  Today we are losing our jobs, but in 2012, it's their turn.

http://www.frontier2000.net/

New Appraisal Rules Begin November 1

Yesterday I spoke to a long-time friend of mine who owns an appraisal company.  It seemed strange to think that up until a little over a year ago, I used to call his company frequently to order appraisals, and check the status of pending orders.  Since the Home Valuation Code of Conduct was implemented in May of 2009 as a result of a settlement between Andrew Cuomo and Fannie Mae and Freddie Mac, none of us loan originators have been able to order appraisals for loans that were going to be sold to Fannie Mae and Freddie Mac.  So for almost a year and a half, I have been getting my appraisals through whatever company the lender chooses and seeing them after the underwriter does.

When the Home Valuation Code of Conduct was first introduced, the mortgage broker industry cried foul since it took the mortgage loan originator (and specifically the small, independent mortgage broker) completely out of the appraisal ordering process.  After 11 years in business, rather than calling an appraiser I knew and could rely on, I placed an order through the lender's website and they randomly selected an appraiser from their list.  Some of those appraisals were so far off the mark that I was shocked--I still remember the Las Cruces appraiser who appraised a home selling for $360,000 for only $270,000.  He compared the property to a foreclosure next door.   Other appraisals were surprisingly good.  I discovered that appraisers who worked hard and took pride in their work continued to do so even though they were being hired by AMCs while appraisers who had always produced substandard work continued to do so as well.

Supposedly, the Home Valuation Code of Conduct was necessary to keep corrupt mortgage brokers and loan originators from attempting to influence the value of a property by improperly influencing the appraisers.  And from the stories that I have heard, there were apparently enough incidences of originators pressuring appraisers to make this a real issue.

However, HVCC decimated the small business owners and made them all subject to being hired by an appraisal management company who dictated what they could be paid.  So the rule which was supposed to protect the independence of the appraiser actually harmed the independent small business owner.

As part of the Dodd Frank bill, HVCC has supposedly been eliminated and new appraiser independence rules have been put into place. But the new rules sound an awful lot like the Home Valuation Code of Conduct they replace.  For example,  no employee or or agent or independent contractor (mortgage broker) shall attempt to influence any appraiser through coercion, bribery or threats to bring in a certain value on a property.  In addition, the new rules ban "requesting an appraiser to 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."  Further, "the Seller 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)."  So for those who have been waiting for HVCC to end so that they can go back to the old relationships between originators and appraisers, there is going to be a long wait.

What I find truly interesting about both HVCC and the new appraiser independence rules is while both claim to protect the independence of the appraiser, neither one makes it illegal for a bank holding company to own an appraisal management company or to use an in house appraiser.  As long as the loan officer involved in the transaction does not have direct personal contact with the appraiser, this is not considered a conflict of interest.  But in reality, if the bank holding company pays the appraiser's salary--either directly or through an appraisal management company--and the bank sends the appraiser a purchase contract for a property, the appraiser is going to probably feel some obligation to appraise that property for the sales price.  And appraisers who do not feel any such obligation may find themselves unemployed.

I have noticed what appears to me to be a real shift in the appraisals that I have received over the last nearly 18 months since HVCC was implemented.  At first, very few properties appraised for the expected value.  That it turn led to a lot of deals falling through.  I talked to a title officer last year who said that she had a stack of files in her office that had fallen through because the appraisals were too low that "looked like the leaning Tower of Pisa."  When we challenged the valuations of appraisals through the AMCs, we got back notes like the one that I received when I challenged the Las Cruces appraiser.  That appraiser emailed back a nasty comment saying that he did not have to please loan originators any more since we could not hire him. 

However, lost deals cost money.  Lost deals with interest rate loan locks cost the banks a lot of money.  So it was probably inevitable that the trend of properties not appraising for value would be reversed. Nowadays, most of the appraisals do come in for value.  That may be due to the market stabilizing some, but it seems to me to also be due to a general understanding that appraisals on purchases "must" come in.  Earlier this month I completed a purchase transaction through a major wholesaler.  I really feared that the property would not appraise since it was a large home on the eastside of El Paso where it can be hard to find comparables for more expensive properties.  I placed the appraisal order through the lender who placed it through their appraisal management company.  When I got the appraisal back, I was shocked to see that the appraisal had actually come in $17,000 higher than the sales price. When I looked to see who had completed the report, I saw that it was an individual I would never have hired to appraise any property--much less a difficult, complex property such as this one.  To me it appeared that she had pushed to match the contract price--actually to exceed the price--rather than to really accurately assess the value of the property.  Since I am not allowed to have any direct contact with the appraiser, I was very interested to see how the underwriter would feel about the report.  To my surprise, all she asked for was a letter explaining why some of the comparables used were so far away from the subject.  The appraiser put notes of explanation in the file, sent the report back, and the underwriter accepted it.

Don't misunderstand--my loan closed and I was happy.  But I firmly believe that if I had hired an appraiser who had produced a report of that quality and sent it to the underwriter, at the very minimum she would have required a review and she might have conditioned for a new second appraisal.  It appears to me that now that the originator is no longer a factor in the appraisal process, the overall quality of the work does not seem to matter at all.  The only thing that matters is that the originator did not have a conversation with the appraiser.

One problem that is supposed to be addressed through the new rules is the matter of appraiser compensation.  The new rules are supposed to require that appraisers be licensed in the states in which they work and that they be paid a fair wage for their work.  Fair market wages would tend to improve the quality of the workmanship.  But there should be some other system besides a rotation to insure that qualified, capable people are rewarded over those who really do not know what they are doing.

The great irony of the entire appraisal mess is that just before the real estate market imploded, Fannie Mae loan approvals were coming back with conditions for limited appraisals, exterior only appraisals, and sometimes no appraisals at all.  If the automated system agreed with the stated value of the property, then the borrower could get away without getting the house appraised.  Now, three years into the market meltdown, this phenomenon has returned in a big way.  A majority of the loans that I do now do not require an appraisal with a value--they allow for exterior photos only (what is called a form 2075).  And in some cases, the findings do not require any appraisal or inspection of the property. So the irony of the new real estate market is that neither the appraiser nor the originator is really determining the value of real estate properties--that information is being pre-determined by pre-programmed information in the computers at Fannie Mae.
                                                                            
                                                                       

Taking a Closer Look at Appraisals now that Dodd Frank is on its Way to the President's Desk

The Senate passed the Dodd Frank bill at about 3:00 P.M.Eastern Standard time this afternoon. The bill is expected to be signed by the President next week, and then the long process of implementing each of the various changes to the financial system which are codified into law will begin.

I read this afternoon that the new law requires that over 550 new regulations be written, so we will not really know what we have on our hands for quite some time.

On that note, I need to correct and amplify a post from last week regarding HVCC and the new law. First, an apology. I always want to be as accurate as possible, and I said in error that the bill does not get rid of HVCC. The section on appraisals starts on page 2205 of the bill, in Subtitle F, and goes on to about page 2251. I started reading further past that, so I missed the paragraph sunseting the bill. On page 2216, paragraph J, the bill reads, "Sunset--Effective on the date the interim final regulations are promulgated pursuant to subsection g, the Home Valuation Code of Conduct announced by the Federal Housing Finance Agency on December 23, 2008 shall have no force or effect." So, technically, HVCC is gone. But many of the provisions of the code are enacted into the new bill. I am quoting here, but I invite everyone to read this section and see if you interpret it as I do.

For instance, on page 2208, section (c) "Free Copy of Appraisal:--A creditor shall provide 1 copy of each appraisal conducted in accordance with this section in connection with a higher-risk mortgage to the applicant without charge, and at least 3 days prior to the transaction closing date." Page 2243 states, under copies furnished to applicants--"In general each creditor shall furnish an applicant a copy of any and all written appraisals and valuations developed in connection with the applicant's applications for a loan that is secured or would have been secured by a first lien dwelling promptly upon completion, but in no case later than 3 days prior to the closing of the loan..." And then on page 2244 it clarifies, "The applicant may waive the 3 day requirement provided for in paragraph (1) except where otherwise required in law."

This language comes directly from the home valuation code of conduct. I certainly have no problem furnishing borrowers with their appraisals--we always did even before HVCC, but this three day requirement with a possibility for a waiver came straight out of Cuomo's rule. We even have a form that borrowers have to sign with this exact language in it. So the three day rule with possibility of waiver is here to stay.

The House bill was supposed to contain strong language to guarantee appraiser independence. Page 2210 Section 129E states, "In General--It shall be unlawful, in extending credit or in providing any services for a consumer credit transaction secured by the principal dwelling of the consumer, to engage in any act or practice that violates appraiser independence as described in or pursuant to regulations prescribed by this section...For purposes of subsection a, acts or practices that violate appraisal independence shall include--any appraisal of a property offered as security for repayment of the consumer credit transaction that is conducted in connection with such transaction in which a person compensates, coerces, extorts, colludes, instructs, induces, bribes, or intimidates a person, appraisal management company, firm or other entity conducting or involved in an appraisal, or attempts to compensate, coerce, extort collude, instruct, induce, bribe or intimidate such a person, for the purpose of causing the appraised value assigned, under the appraisal, to the property to be based on any factor other than the independent judgment of the appraiser; mischaractering, or suborning any mischaracterization of, the appraised value of the property securing the extension of the credit; seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of a transaction; and withholding or threatening to withhold timely payment for an appraisal report or for appraisal services rendered when the appraisal report or services are provided for in accordance with the contract between parties." This section goes on to say, that these requirements shall not be construed to prevent any mortgage lender, mortgage banker, mortgage broker, real estate broker, appraisal management company, employee of an appraisal management company, consumer or any other person with an interest in a real estate transaction from asking an appraiser to: "Consider additional appropriate property information, including the consideration of additional comparable properties to make or support an appraisal; provide further detail, substantiation or explanation for the appraiser's value conclusion,[or] correct errors in the appraisal report." This final sentence is also straight out of the Home Valuation Code of Conduct. These were the three areas in which a lender could request that changes be made to a report.

Nothing in the new law appears to prohibit loan originators from ordering appraisals or having contact with the appraiser. However, the penalties for anything which may be interpreted as collusion are so severe that I believe in practice lenders will have to continue using AMCs. Page 2212 Section E, "Mandatory Reporting--Any mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal management company, employee of an appraisal management company, or any other person involved in a real estate transaction involving an appraisal in connection with a consumer credit transaction secured by the principal dwelling of a consumer who has a reasonable basis to believe an appraiser is failing to comply with the Uniform Standards of Professional Appraisal Practice is violating applicable laws, or is otherwise engaging in unethical or unprofessional conduct, shall refer the matter to the applicable State appraiser certifying and licensing agency."

On the creditor side, "In connection with a consumer credit transaction secured by a consumer's principal dwelling, a creditor who knows at or before loan consummation, of a violation of the appraisal independence standards established in subsections (b) or (d) shall not extend credit based on such appraisal unless the creditor documents that the creditor has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of such dwelling."

The penalties for violating this statute are severe. Violates "shall forfeit and pay a civil penalty of not more than $10,000 for each day that any such violation continues" for the first violation and $20,000 per day for any subsequent violation (page 2216 and 2217 section K items 1 and 2). OUCH! Those types of penalties are stiff enough to get anyone's attention. Further, the exact activities that constitute violations are unclear because these will be written in regulations developed by the Consumer Financial Protection Bureau along with the Federal Reserve Board and other regulatory agencies. "[They] and the Bureau may jointly issue rules, interpretive guidelines, and general statements of policy with respect to acts or practices that violate appraisal independence in the provision of mortgage lending services." Page 2214 states, "The Board shall, for purposes of this section, prescribe interim final regulations no later than 90 days after the date of enactment of this section defining with specificity acts or practices that violate appraisal independence in the provision of mortgage lending services..." Those rules, whatever they are, will determine the extent of the contact, if any, that the loan originator is allowed to have with the appraiser. But if a lender and I are both facing a $10,000 fine if the government decides that we are influencing the appraiser, both of us are going to err on the side of extreme caution. And if a loan that violates appraiser independence is an illegal loan, which it now is, we are going to be doubly careful. So I believe that ultimately, the use of AMCs will spread to all loans, not just those sold to Fannie Mae and Freddie Mac. Right now, my portfolio savings and loan lender can accept an appraisal that is not HVCC compliant because they don't sell the loan, but when this bill becomes law next week, they will not want to face the fines and consequences of having an appraisal that I ordered in the file. And I believe that the authors of this bill know this too, because they have instructed that the new good faith estimates should contain a breakdown of the AMCs fee and the part that was actually paid to the appraiser.

The bill does correct one big problem with HVCC and that is the low pay of appraisers by AMCs. On page 2215, the bill states that lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised. "Evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys. Fee studies shall exclude assignments ordered by known appraisal managemnt companies." And the bill makes provision for a fee appraiser to charge more for a complex report: "In the case of an appraisal involving a complex assignment, the customary and reasonable fee may reflect the increased time, difficulty and scope of the work required for such an appraisal and include an amount over and above the customary and reasonable fee for non complex assignments."

Finally, one of the most frustrating and expensive aspects of HVCC for the loan officer and the borrower is that appraisals are basically not portable among lenders. Today, for instance, I have a loan that was declined, but the borrower had already paid for and received a perfectly good appraisal and a rent comp schedule. These two products are expensive, but she has no choice but to order new ones. When I was explaining to the agent that we have to move the loan, she said, "Under the new rules they have to transfer the appraisal." I explained that the financial reform bill will not be law until next week, but I looked up this provision especially because of this conversation. Page 2214 states under letter (h) Appraisal Report Portability, "Consistent with the requirements of this section, the Board, [and other federal agencies] may jointly issue regulations that address the issue of appraisal portability, including regulations that ensure the portability of the appraisal report between lenders for a consumer credit transaction secured by a 1-4 single family residence that is a principal dwelling of the consumer." So what does that mean exactly? We have to wait until they write the new rules to find out.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books.  For more information, visit her website at http://www.frontier2000.net

How Will Financial Reform Affect the Future of HVCC? Part II

When I wrote Part I of this article, I had hopes that the financial reform bill would sunset HVCC--the Home Valuation Code of Conduct--which was the agreement made between Andrew Cuomo and Fannie Mae and Freddie Mac in order to get Cuomo to drop a criminal investigation against both entities. HVCC was the code adopted which legislated that mortgage loan originators would no longer have contact with appraisers and that appraisals would be ordered through appraisal management companies.

The reason that I had hopes that the code would be sunseted was that the house version of the bill did sunset the provisions of the code. However, the Senate bill did not, and the final bill does not. While the bill does call for a study of the provisions of the Home Valuation Code of Conduct and its impact on the housing market, the bill does not eliminate it and it does require that originators not have contact with appraisers. If anything, the final version of the bill actually strengthens the provisions of the HVCC, because HVCC only pertained to loans sold to Fannie Mae and Freddie Mac, while the new Dodd-Frank Wall Street Reform and Consumer Protection Act, as it has been been renamed, applies to all residential mortgage lending.

As those of us who work in real estate are well aware, the Home Valuation Code of Conduct prohibits a loan originator from hiring an appraiser or having any contact with the appraiser. It also prohibits ordering a second appraisal if the buyer and seller disagree with the valuation of the house. The only way to correct a low valuation is to start over with a new lender and a new loan and order a new appraisal. And in real terms, the Home Valuation Code of Conduct means that is a loan is denied for any reason, the appraisal is not really transferable, even if the reason for the denial had nothing to do with the property. This can get very expensive, especially on appraisals for investment properties where additional schedules are required, since the AMCs set the price. A borrower can end up spending close to $1000.00 to get a second appraisal with an operating income statement for an investment property if his loan is denied.

This is one reason that many of us in the lending and real estate communities were hoping that HVCC would be ended in the financial reform bill and replaced with language guaranteeing appraiser independence. But instead, HVCC goes on. The Dodd-Frank Act deals with the problem of HVCC much the way that it deals with the problem of Fannie Mae and Freddie Mac and many other problems--it calls for a study. "12 months after the date of enactment of this Act, the Government Accountability Office shall submit a study to the Committee on Banking Housing and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives, and 90 days after the date of the enactment of this Act, the Governmment Accountability Office shall provide a report on the status of the study and any preliminary findings to the Committee on Banking, Housing and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives."

And what will this study cover? "The study required by this section shall include an examination of the following...The prevalence, alone or in combination, of certain appraisal approaches, models and channels in purchase money and refinance mortgage transactions; The accuracy of these approaches, models and channels in assessing property as collateral; Whether and how these approaches, models and channels contributed to price speculation during the previous cycle; the costs to consumers of these approaches, models and channels, the disclosure of fees to consumers in the appraisal process; to what extent the usage of these approaches, models and channels may be influenced by a conflict of interest between the mortgage lender and the appraiser and the mechanism by which the lender selects and compensates the appraiser...How the HVCC affects mortgage lenders' selection of appraisers; How the HVCC affects state regulation of appraisers and appraisal distibution channels; how the HVCC affects the quality and cost of appraisals and the length of time to obtain an appraisal; and how the HVCC affects mortgage brokers, small businesses and consumers."

Actually the government does not need to spend taxpayer dollars to do a study on this. The mortgage broker community and the appraisal community have all weighed in on HVCC, and the regulation has received more than its fair share of bad PR since it went into effect in May of 2009. Opponents of HVCC organized a petition which received over 100,000 signatures asking that HVCC be repealed last year.

In addition, the Dodd Frank Bill authorizes a second study, which shall include an examination of, "the Appraisal Subcommittee's ability to monitor and enforce State and Federal certification requirements and standards including by providing a summary with a statistical breakdown of enforcement actions taken during the last ten years, and whether existing Federal financial institutions exemptions on appraisals for federally related transactions needs to be revised; and whether new means of data collection, such as the establishment of a national repository would benefit the Appraisal Subcommittee's ability to perform its functions." Last but not least the Dodd Frank Bill will amend RESPA by adding that a new combination good faith estimate and truth in lending form, which is mandated to be developed by the new Bureau of Consumer Financial Protection, may provide a clear disclosure of "the fee paid directly to the appraiser by such company (an AMC) and the administration fee charged by such company (the AMC)."

In other words, watch out. After the Feds complete their study of the models, processes and procedures for appraising properties and whether those models and processes led to the last real estate boom, they can rewrite all of the rules of appraising to make sure that we never have another boom again. And it is apparently okay to make small business owners work for Appraisal Management Companies as long as the consumer is fully aware that much of the money he is paying for his home valuation is going to the AMC taking the order and not to the individual doing the work.

How Will Financial Reform Affect the Future of HVCC?

As the two financial reform bills (HR 4173 and SB 3217) go to conference committee this week, one of the major questions on the minds of those in various aspects of the real estate industry is how the bills will ultimately affect the future of the HVCC (Home Valuation Code of Conduct).

The Home Valuation Code of Conduct was the outgrowth of a settlement between New York attorney general Andrew Cuomo and Fannie Mae and Freddie Mac. Cuomo agreed to drop an investigation against the two mortgage giants if they would agree to accept the code. HVCC went into effect of May of 2009 and has presented a number of challenges for the industry ever since.

HVCC was supposed to guarantee appraisal independence by banning mortgage loan originators from ordering appraisals, choosing appraisers, or speaking to appraisers directly. Retail banks can have a separate department that is not compensated based on loan volume order the appraisals, but the code expressly states that no mortgage broker or employee of a mortgage broker can order an appraisal.

In order to ensure compliance with the code, the appraisal-ordering process was turned over to appraisal management companies who take down the order, charge the loan originator for the appraisal, select the appraiser, handle all interaction with the appraiser, and send the completed report back to the loan originator.

The problems arose as AMCs hired out of area appraisers who did not understand the real estate market, undervalued houses, and refused to acknowledge errors or look at different comps. The costs also rose for the consumer (in some cases dramatically) since the AMC added its fees for managing the process to the fees of the appraiser who was actually doing all of the work.

Both mortgage brokers and many appraisers have opposed the provisions of the code, and widespread industry opposition has led to lobbying efforts to include a "fix" in the financial reform bill. In fact, the house bill, HR 4173, section 4312, specifically deals with the Home Valuation Code of Conduct and appraisal independence issues. Under the provisions of the house bill a negotiated rulemaking committee would be set up to review and set in place new standards for appraisal independence. The Negotiated Rulemaking Committee: "shall not prohibit lenders, the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) from accepting any appraisal report completed by an appraiser selected, retained or compensated in any manner by a mortgage loan originator" (provided that the originator is properly licensed under the SAFE ACT). The bill also mandates appraisal independence, sets clear guidelines for maintaining the autonomy of appraisers and seeks to enforce, "state or federal laws that make it unlawful for a mortgage originator to make any payment, threat or promise, directly or indirectly, to any appraiser of a property, for the purposes of influencing the independent judgment of the appraiser with respect to the value of the property, except that nothing in this section shall prohibit a person with an interest in a real estate transaction from asking an appraiser to consider additional appropriate property information; provide further detail, substantiation or explanation for the appraiser's value conclusion, or correct errors in the appraisal report." The bill also covers appraiser compensation, which has become a huge issue since HVCC was enacted. Once appraisals on loans which were sold to Fannie Mae and Freddie Mac had to be ordered through third party AMCs, the AMCs could dictate how much money appraisers were paid. HR 4173 does address this issue, and states that "lenders and their agents [must] compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area."

Effective on the date that the new rules are introduced, the problematic Home Valuation Code of Conduct will no longer remain in effect.

While the House bill spells out this section very clearly, the Senate bill ignores HVCC and appraisal independence totally, so it will be up to the conference committee to see whether the final bill includes the verbage from section 4173 or whether the current Home Valuation Code of Conduct is allowed to stand. But regardless of what happens in conference for the final bill, HVCC's days are probably numbered. The reason? HVCC is not federal law--it was a legal agreement among Fannie Mae, Freddie Mac and the attorney general of New York. Loans that are not sold to Fannie Mae and Freddie Mac are not governed by the agreement, although most lenders do require the use of AMCs on all loans now. And the Senate Bill does call for a study of exit strategies for Fannie Mae and Freddie Mac to be completed no later than January of 2011. Barney Frank and Tim Geithner have both stated that a whole new system of housing finance needs to be introduced. That new agency, whatever it turns out to be, will not be bound by HVCC; it will be subject to whatever laws and guidelines are set in place by its creators. So for everyone who is hoping for an end to all of the problems caused by HVCC, help appears to be on the way--one way or another.