The Home Valuation Code of Conduct (HVCC) is in Effect — What Does it Mean for Your Community Bank?

Changes to the residential lending market and the way lenders originate, process, close, fund and service loans have been happening fast. One such recent change, the Home Valuation Code of Conduct (HVCC) affects the way lenders who sell to Fannie Mae and Freddie Mac order, collect and deliver property appraisals.

Background

The HVCC is the result of an agreement made in March 2008 between Fannie Mae, Freddie Mac, the Federal Housing Finance Agency (FHFA) and New York Attorney General Andrew M. Cuomo. The new code, which took effect Friday, May 1, 2009, stems from an investigation into the practices of Washington Mutual (WUMA) and eAppraiseIT, an appraisal management company (AMC).

Specifically, it was alleged that eAppraiseIT pressured appraisers on behalf of WUMA. In the end, the investigation was set aside, but only after the parties involved signed an agreement that resulted in what we now know as the HVCC.

Why do we need the HVCC?

Whether or not the HVCC will be a help or hindrance to community bankers remains to be seen. While the intent of the code is noble—to reduce fraud and ensure the independence of property appraisals, thereby protecting homeowners and residential mortgage investors—this may prove to be yet another instance where community banks are punished for crimes they did not commit.

The new guidelines took effect on May 1, 2009 and are outlined below:

Guidelines

Effective May 1, 2009, all appraisals must be ordered by an independent appraisal company (a third party specifically authorized by the lender) or an appraisal management company.

The new HVCC covers single-family conventional loans sold to Fannie Mae and Freddie Mac. It does not apply to loans guaranteed by a federal agency and then sold to either Fannie or Freddie, such as FHA, VA or USDA Rural Housing loans. Furthermore, loans sold to the GSEs on or after May 1, 2009 that were originated prior to May 1, 2009 are not subject to HVCC guidelines.

Fannie Mae and Freddie Mac will no longer purchase loans from lenders who accept appraisal reports completed by an appraiser selected, retained or compensated in any manner by the lender. This means that an originating lender, its employees, directors, officers, or any agent of the lender, may not order or pay for an appraisal for a property being sold to Fannie and Freddie. A lender is also barred from engaging in substantive communications with an appraiser, third party designee, or an AMC, that would have an impact on the valuation and ordering or managing of an appraisal assignment.

The code only applies to the loan origination process. Therefore, a lender can use in-house staff appraisers, order appraisals and conduct quality control reviews for other transactions like loan workouts. Appraisals performed for loss mitigation purposes are also not governed by the code nor does the HVCC apply to appraisals for the cancelation of mortgage insurance.

An appraisal obtained by a lender may be transferred to another lender as long as the appraisal meets the code and the first lender is named as a client on the appraisal report. This type of transfer must include in the file, written assurances from the original lender that the appraisal meets HVCC guidelines.

As part of the HVCC, the borrower must be provided a copy of the appraisal report no less than 3 business days prior to closing, unless the borrower waives the requirement. The code prohibits the borrower from directly paying for the appraisal. Only a lender or third party specifically authorized by the lender (including, but not limited to, appraisal companies, appraisal management companies, AMC, and correspondent lenders)  can select, retain and provide compensation to the appraiser. The specially authorized third party or AMC may also collect a fee for their services, which will ultimately be passed on to the consumer or absorbed by the lender. An AMC is not required to provide the originating lender with a copy of the appraisal.

For more information on the HVCC visit the following web sites:

• Freddie Mac
  
  
• Fannie Mae
  
  
• Federal Housing Finance Agency (FHFA)
  
  

Conclusion

Today, AMCs are not regulated so it is unclear, if in fact the new HVCC will reduce fraud and protect the consumer. It will add more paperwork, less control, and reduced income for most regional appraisers. Written requests for appraisals will have to be generated and additional invoices sent. The originating lender may not know the cost of an appraisal for all the initial disclosures required at time of application, causing them to have to re-issue documents and possibly eat additional costs. Appraisers who want to appraise property on a loan being sold to either Fannie or Freddie must join an AMC or third party designee. In doing so the appraisers are required to share a portion of the appraisal fee, which in some areas can be as much as 40 percent. If an appraiser chooses not to join and share their income, they will likely experience a decline in demand for their services.

So once again, the question lenders are asking is, “Will the new HVCC help the mortgage industry or will it hurt those that have always followed the rules and served their communities?” Unfortunately, only time will tell.

ICBA Mortgage would like to understand how this new code affects your bank. Does the new code positively support the way your bank is originating for the secondary market? Does the new code negatively impact the way your bank originates secondary market loans? Please click here to post your concerns, experiences and comments on our web site.