HVCC to AMC to AIR
The Home Valuation Code of Conduct (HVCC) establishes standards for solicitation, selection, compensation, conflicts of interest and appraiser independence. It became effective May 1, 2009, for any mortgage that will be sold to Fannie Mae or Freddie Mac; Federal Housing Administration (FHA) and Federal Home Loan Bank (FHLB) mortgages are not covered in the agreement. Its effect is similar to that of FIRREA, enacted in 1989 after the infamous S&L scandals, which included the creation of an Appraisal Subcommittee whose primary focus was to establish and monitor certification for appraisers.
As a result of HVCC, REALTORS® and mortgage brokers are prohibited from directly selecting appraisers. Lenders may use “in house” staff appraisers to conduct appraisals. However, the loan production staff is prohibited from: selecting, retaining, recommending, or influencing the selection of an appraiser; and, conducting any substantive conversation with an appraiser or appraisal management company regarding the appraisal assignment.
However, Fannie Mae, in its announcement SEL 2010-09 makes it clear that the HVCC was never intended to cut off appraisers from any communication: “Communication under the HVCC. In an attempt to comply with the HVCC, some lenders do not allow communication with appraisers and other parties involved in a real estate transaction. Fannie Mae has determined that appropriate communication under the HVCC is permitted, and that Section 1-C of the HVCC does not prohibit any employee of the lender or an authorized third party from requesting that an appraiser provide additional information or explanation about the basis for a valuation or from correcting objective factual errors in an appraisal report.”
As of October 2010, the HVCC was effectively “phased out” by virtue of the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Fannie Mae and the Federal Housing Finance Agency are jointly working on the new Appraiser Independence Requirements which, as Fannie Mae states in its Announcement SEL-2010-14, “pose no significant changes to core principles of the HVCC and incorporate language to clarify questions that arose in the implementation of the HVCC. Fannie Mae has also removed certain provisions from the updated requirements as they already exist elsewhere in the Selling Guide, such as the need for lender quality control testing for appraisals.” (Emphasis from the original text.)
Lenders are required to set up a “firewall” between loan production staff and the appraisal process. The underwriter may not communicate with the appraiser. Many lenders have gone to working with appraisal management companies (AMC’s) to avoid issues. However, AMC’s are not very well regulated, (although individual states are in various stages of setting up legislation to do so) which means that they can hire appraisers who are not necessarily competent in area they are hired to appraise. Unfortunately, this means that the ultimate effect of the HVCC is that appraisals are conducted by increasingly incompetent folks, especially when it comes to green building appraisal.
Out of the pan into the fire? Many people feel that the HVCC may have created a “monster.” In a Business Week article, February 5, 2009 it was reported that “several appraisers, including the Appraisal Institute’s Director of Government and External Relations, Bill Garber, weighs in on Home Valuation Code of Conduct may actually prove counter-productive to the goals of appraiser independence and improved appraisal quality." As Garber warns in the article about improper influence on appraisers, “[The new industry-wide rules] have transferred the problem to these appraisal management companies, which are not regulated by anybody. “ Many have raised the concern about competency requirements being ignored by AMC’s that are not necessarily scrupulous.
And then there’s still the issue of “underwriter scrutiny.” While generally speaking underwriters are not professional appraisers and do not re-appraise the property, they have been known to “tinker” with appraisal to assure that it meets the requirements of the investor and sometimes request additional information to substantiate the value. In this current market, “even seemingly low appraisals are being questioned by lenders, who have been burned by the mortgage crisis and are now scrutinizing loan applications with much more care,” reports Ed Craine, Vice President of the California Association of Mortgage Brokers. "You can have what I call a very realistic or conservative appraisal done by an independent fee appraiser and that will go to a lender's underwriter, and the lender can come back saying we don't think that value is accurate," said Craine, who is also president of the San Francisco mortgage brokerage Smith-Craine Finance. "It used to only happen once in a blue moon. Now it's happening maybe 1 in every 10 times.”
As with many other aspects of the housing market, what's happening with appraisals is directly tied to the turmoil in the mortgage industry. "What we've seen with the return to proper underwriting guidelines is that lenders are looking much more closely at appraisals," states Aldo Congi, a vice president at McGuire Real Estate in San Francisco.
There doesn’t seem to be much recourse for an incompetent appraisal. When the HVCC was established, there was supposed to be a corollary agency established where complaints could be registered. This agency (as of this writing) has yet to be created. And even though Fannie Mae has used strong language regarding how AMC’s are to adhere to the rules just like everyone else, challenging their actions can be pretty tough.
Enter the “state legislatures.” Where the federal government falls short of follow-through for laws it lays down, the states, in response to their constituencies have stepped up to the challenge. Most have approached the problem by starting with a registration requirement. In order to register and keep licenses AMC’s must pay steep fees and follow strict guidelines. These states include North Carolina, California, New Mexico, Nevada and Arkansas. Some states are also denying applications from convicted felons and/or prohibiting those registered AMC’s from pressuring appraisers to hurry through the appraisal process and requiring them to pay market compensation. Though many doubt that these practices will truly keep AMC’s in line, the argument could be made that they are better than nothing.
Unfortunately for the booming green building movement, ignorance among AMC’s and mortgage underwriters and paranoia about over-inflating appraisals continues to overshadow the mounting evidence that green buildings are really better and worth more.
(Sources: www.realtor.org ; http://www.businessweek.com.; www.mortgagesfirst.com/library/loan-process/underwriting.htm; www.articles.sfgate.com )
