FHFA to Modify HVCC Appraisal Enforcement. When Can An Originator Question An Appraiser?

The Federal Housing Finance Agency opened yet another chapter in the ongoing tale of home appraisals, their role in the housing bubble, and in the recovery.

In a letter addressed to Andrew M. Cuomo, the New York State Attorney General today, Edward J. DeMarco, acting director of the agency announced a change in the administration of the Home Valuation Code of Conduct (HVCC.

The code was implemented in May, 2009 in an attempt to insulate appraisers from undue pressure and conflicts of interest which many appraisers and others in the real estate market felt had been rampant during the housing boom of 2005-2007. HVCC was intended to promote professional appraisals free from inappropriate pressure from lenders, borrowers, or brokers which remained a factor even when the market went into a rapid decline.

The Code set forward specific prohibitions on lender behavior which could be construed as pressuring an appraiser in order to obtain a favorable value and sets up mechanisms to separate the underwriting process from the appraisal commissioning process. DeMarco said that both Fannie Mae and Freddie Mac have found that appraisal quality has improved since the Code's implementation.

Cuomo was particularly aggressive in pursuing mortgage fraud and other illegal housing-related activities and, as a result of actions brought by the AG's office, Freddie Mac and Fannie Mae signed an HVCC Cooperation Agreement, approved by FHFA, in December, 2008. The Agreement established HVCC as the standard for all mortgages purchased by the government sponsored enterprises nationwide and required the enterprises to set up and fund an Independent Valuation Protection Institute to enforce provisions of the code.

In today's letter, DeMarco informed the Attorney General that Fannie Mae and Freddie Mac, both of which are operating under a federal conservatorship, will no longer be funding the Independent Valuation Protection Institute.

DeMarco said, "As conservator of Fannie Mae and Freddie Mac, our priority is to keep the Enterprises focused on the important role they play in supporting the mortgage market. The need for a complaint process is being addressed in a way that we believe is more practical than with the Institute."

He cited "the billions of dollars in taxpayer funds the Enterprises have drawn since entering conservatorships" and said he cannot, as conservator, justify the Enterprises funding the Institute. Therefore, he said, he has determined that they will not proceed with that portion of the Cooperation Agreements.

In lieu of the Institute, DeMarco has directed the Enterprises to provide a targeted complaint process for violations of HVCC. Freddie and Fannie will use a standardized complaint form and process to facilitate submission of the form through an Internet-based process. The Enterprises will act on matters received, will refer cases to state regulatory agencies where appropriate, identify practices suggestive of fraud or non-compliance with the Code and provide a summary of results to FHFA and Cuomo's office. The process will be in place in a matter of weeks.

New York's Attorney General has a reputation as a, shall we say, aggressive and tenacious law enforcement officer. It will be interesting to see his reaction to FHFA's unilateral change to the Agreements.

IF YOU ARE A LOAN ORIGINATOR AND BELIEVE YOU HAVE REASON TO SPEAK DIRECTLY TO AN APPRAISER ABOUT THEIR WORK. THERE ARE SPECIFIC CIRCUMSTANCES THAT DO NOT VIOLATE REGULATION.

From Reg Z:

226.36 Prohibited acts or practices in connection with credit secured by a consumer's principal dwelling.

(b) Misrepresentation of value of consumer's dwelling--(1) Coercion of appraiser.

In connection with a consumer credit transaction secured by a consumer's principal dwelling, no creditor or mortgage broker, and no affiliate of a creditor or mortgage broker shall directly or indirectly coerce, influence, or otherwise encourage an appraiser to misstate or misrepresent the value of such dwelling.

(i) Examples of actions that violate this paragraph (b)(1) include:
(A) Implying to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a consumer's principal dwelling;
(B) Excluding an appraiser from consideration for future engagement because the appraiser reports a value of a consumer's principal dwelling that does not meet or exceed a minimum threshold;
(C) Telling an appraiser a minimum reported value of a consumer's principal dwelling that is needed to approve the loan;
(D) Failing to compensate an appraiser because the appraiser does not value a consumer's principal dwelling at or above a certain amount; and
(E) Conditioning an appraiser's compensation on loan consummation.

(ii) Examples of actions that do not violate this paragraph (b)(1) include:
(A) Asking an appraiser to consider additional information about a consumer's principal dwelling or about comparable properties;
(B) Requesting that an appraiser provide additional information about the basis for a valuation;
(C) Requesting that an appraiser correct factual errors in a valuation;
(D) Obtaining multiple appraisals of a consumer's principal dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value;
(E) Withholding compensation from an appraiser for breach of contract or substandard performance of services as provided by contract; and
(F) Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.

By Jann Swanson