Readers Please Note:  An earlier version of this post can be found on Radical Title Talk as Posted by Diane Cipa and is in the post's original format.  This post as seen on Table Talk With Apella has been edited to provide better reference to contributing minds.  Table Talk With Apella thanks Diane Cipa and Radical Title Talk in their efforts to promote awareness to this issue and encourages readers to visit the title world.

As of late February New York Attorney General Andrew M. Cuomo and Fannie Mae/Freddie Mac established an agreement that has been titled The Home Valuation Code of Conduct. With in the last week Apella has researched the various elements of the Code and compiled a listing of the segments with plus points in relation to short comings of the agreement. The short comings are stated in respect with Apella’s view as explained below the findings.

First, thanks must go out to persons and blogs that have assisted in the compiling of the following. Table Talk With Apella extends gratitude to the Appraisal Scoop Blog and Jillayne Schlicke of Ethical Lending Foundation and Rain City Blog as well as Jose Rodriguez of Athena National Residential Service Group for their input and questions raised to the issue at hand. The findings and compiling of The Home Valuation Code of Conduct is that of the writer of Table Talk With Apella. It should be dually noted that this posting is not an official press release by Apella Real Estate Business Solutions.  Nothing noted in this post should be considered as legal advice in pertaining to any mentioned bills or laws.

The Home Valuation Code of Conduct is compiled of eleven sections. The item holds much potential in effecting the appraisal industry and the parties that use appraisal services for loans that are sold to the government-sponsored enterprises. The Home Valuation Code of Conduct was welcomed and endorsed or commended by all major appraisal groups including the Appraisal Institute and American Society of Appraisers (ASA noted changes needed). Readers can view the full item via NY State PDF to Press from the press release. As this is a blog post, readers will need to refer to the Home Valuation Code of Conduct for actual and complete section reading. Items have been italicized with section - sub section reference. The post intention is to allow the reader to compile their own independent view based on truthful as possible information and non-subjective links, facts and history.

Per the reading of the Home Valuation Code of Conduct it is perceived that the agreement refers to Fannie Mae and Freddie Mac as “the lender”. Should the Home Valuation Code of Conduct refer or replace Fannie Mae and Freddie Mac as “the lender” with bank, credit union or mortgage company then for the reading of this post Fannie Mae and Freddie Mac should be replaced with the proper type of lending institution.

Section I Sub Section 1 through 10 – Opening paragraph

No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to:

1) Withholding or threat to withhold timely payment

2) Withholding or threat to withhold future business

3) Express or imply promise of future business, promotions or increased income

4) Conditioning the order or pay of appraisal on preliminary estimate requested

5) Request estimate, predetermined/desired value or to provide estimated values or comparables prior to completion of report

6) Providing appraiser value or target amount (other then sales agreement)

7) Providing any entity including related persons stock, financial or non-financial benefits

8) Allowing the removal of an appraiser from a list of qualified appraisers without notice and evidence of appraiser’s illegal conduct or violation of USPAP

9) Use of second appraisal or AVM only to reach desired value

10) Any other act that impairs or attempts to impair appraiser’s independence, objectivity or impartiality

Section I Plus Points

The section is drafted very similar to a bill that was introduced on October 10^th of 2007 by Rep. Paul Kanjorski (D-PA) and Co-Sponsored by 13 others from both sides of the U.S. House lisle. H.R. 3837 titled Escrow, Appraisal, and Mortgage Servicing Improvements Act purposes is to amend the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). FIRREA is Title XI U.S. Code

Section (g) of H.R. 3837 seeks:

(1) Prohibitions On Interested Parties In A Real Estate Transaction – No mortgage lender, mortgage broker, mortgage banker, real estate broker, nor any other person with an interest in a real estate transaction involving an appraisal shall improperly influence, or attempt to improperly influence, through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, non-payment for services rendered, or bribery, the development, reporting, result, or review of a real estate appraisal sought in connection with a mortgage loan.

This section allows the appraiser to perform the appraisal without threat or influence on final value. With the appraisal based on actual market value or scope of work bank portfolios will be better secured/rated. The section as well takes away the element of commissioned based request for larger numbers.

Section I Con Points

Sub-Section 5 will no longer allow lenders, brokers and originators the ability to request “Comp Searches and/or Pre-Researched” values. This will greatly affect several who seek a pre-qualifying number without first requiring a client to actually pay for the appraisal. With this, mortgage brokers will need to alter their processes for the potential client(s) in order to pre-qualify the deal.

Further more the Home Valuation Code of Conduct does not disclose enforcement or penalties for the request of such request. While the agreement requires the GSE’s to put forth 24 million dollars for the start up of a “Hotline” and “Independent Valuation Protection Institute” for appraisers and others to voice and list complaints, it falls very short in support of actual current laws and state enforcement departments.

Apella’s View – Support For Section I and Sub-Section 5

In regards to Fannie Mae and Freddie Mac, 24 million is not enough and portions of the funds should go to each state appraisal board of enforcement were complaints can be made to the federal entities that governor such infractions. The complaint line should be engaged with direct reporting to the governmental entities that can inflict enough economical damage/time served to ensure infractions are not committed.

Section II – Opening paragraph

The lender shall ensure that the borrower is provided, free of charge, a copy of any appraisal report concerning the borrower’s subject property immediately upon completion, and in any event no less than three days prior to the closing of the loan. The borrower may waive this three-day requirement. The lender may require the borrower to reimburse the lender for the cost of the appraisal.

Section II Plus Points

This section is similar to areas that already are drafted under portions of the Truth in Lending Act and the Equal Credit Opportunity Act. The section requires transparency for the borrower.

Section II Con Points

This section should hold the GSE’s to require the sellers of the loans to prove that the law has been satisfied under the Truth in Lending Act and the Equal Credit Opportunity Act. While the section is supportive of basic consumer rights it does not list penalties for failure to comply nor does it cover enforcement other then relying on the Hot Line and Independent Valuation Protection Institute. The section does not require proof that the consumer has been educated to the rights to a copy of the appraisal. Nor does the section require the ownership rights of the appraisal and/or appraiser agency be disclosed to the borrower by the lender as governed by the FDIC Interagency Appraisal and Evaluation Guidelines. The lender is not required to state the actual fee of the appraisal to the borrower as they would under a HUD statement and this should be for all transactions rather the loan is completed or not, nor does Section II require and/or ensure that fees are in compliance with RESPA.

Apella’s View – Support For Section II With Major Modifications

It is clear that the Home Valuation Code of Conduct fails to stress the amount of borrowers that never see the light of the appraisal done on their property or property of interest. Appraisers are very limited when they receive calls from the borrower’s looking to get a copy of the appraisal. As appraisers or appraisal management companies, the responsibility is only to ensure that the client or party that ordered the appraisal received the appraisal. The appraiser’s agency belongs to the client that placed the order for the appraisal and as such appraisers are not allowed to release a copy of the appraisal to any other party unless a signed release is received by the appraiser or appraisal management company, ether instructing or requesting the appraisal be released to the borrower or other party deemed by the client.

Section III – Opening paragraph

The lender or any third-party specifically authorized by the lender (including. But not limited to, appraisal management companies and correspondent lenders) shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser. The lender 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).

Section III Plus Points

Fannie Mae and/or Freddie Mac (or agents of) are responsible for payment to the appraiser or appraisal management company. This section is similar to RESPA in regards to affiliate relationships.

Section III Con Points

“The lender or any third-party specifically authorized by the lender” holds the pose similar to a bill introduced March 27^th, 2007 by Mr. Wilson of Ohio titled H.R. 1723 Fair FHA Appraisals Act of 2007 with the purposes to amend the National Housing Act to ensure fair appraisals in connection with mortgage insurance program. Per H.R. 1723 Sec. 3 Blind Draws For Appraisers Sub-Section C read as:

That in the case of each mortgage for 1 to 4 family residence to be insured under title II, the appraisal shall be conducted by appraiser who is selected by the Secretary on a rotating basis, mortgage-by-mortgage, from a list of appraisers, which shall be developed by the Secretary, who meet the qualifications and requirements of this subsection.

This phrase leaves the door open to possible fair trade infringements/anti-trust issues or at least the potential of establishing the equals within territories. Similar to heavy airline regulations of the seventies and eighties, this portion of the agreement leads to controlled selection of appraisers.

“shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser.” This statement holds little to payment guidelines and poses the potential for set pricing based on going rates deemed by the “lenders” otherwise known as the GSE’s. This section leads to the belief that the GSE’s will be the main suppliers of appraisal service fees paid. This section does not state a fair pay time lines nor does it cover compensation for appraisals that are preformed for loans that do not close.

This section as well removes the ability of mortgage brokers and originators to place orders for appraisal and services. This in turn will hold great effect on business relationships established by appraisers as well as the mortgagers. Likewise for those real estate brokers/agents that also perform loan services, they too will no longer be able to place orders for their clients should the loans hold the potential to be sold to the GSE’s.

Apella’s View – No Support For Section III

This section infringes too much on free trade and hampers quality as well as the consumer. It is viewed that the cost increases that will be required for the consumer to operate under this section will in the end make the appraisal industry uneconomical and prohibitive for mortgage companies, mid size banks and the consumer making the loan request.

Section IV – Opening paragraph

“If absolute lines of independence cannot be achieved as a result of the originator’s small size and limited staff, the lender must be able to clearly demonstrate that it has prudent safeguards to isolate its collateral evaluation process from influence or interference from its loan production process.”

Section IV Plus Points

Small mortgage offices will have a direct connection to Fannie Mae and Freddie Mac.

Section IV Con Points

Cost of new regulations will make the appraisal and loan process more expensive for the mortgage broker and general consumer.

Apella’s View – No Support For Section IV

Mortgage companies will hold no options other then to place orders with appraisal management companies as many hold no means to support such regulations. Should the mortgage company choose to comply with Section IV the cost will most likely be prohibitive.

Section V – Opening paragraph

Any employee of the lender (or if the lender retains and appraisal management company, any employee of that company) tasked with selection appraisers for and approved panel or substantive appraisal review must be (1) appropriately trained and qualified in the area of real estate and appraisals, and (2) in the case of an employee of the lender, wholly independent of the loan production staff and process.

Section V Plus Points

Section V requires the processor or “employee” to be appropriately trained and qualified in the area of real estate appraisals. This section as well requires proper placement of safe guards with in processes.

Section V Con Points

Section V does not state what “appropriately trained and qualified” is or consist of. Nor does this section require that “employee” be trained directly in USPAP or the Ethics Rule with in USPAP. This section does not state what education meets “appropriately trained and qualified”.

This section will result in higher cost of operation in order to meet educational requirements. The section does not state proper amounts of education making budgeting hard to gauge for small businesses.

Section V lacks in stating agency of the “employee”.

Apella’s View – Support For Section V With Major Modifications

Section V needs to clearly state what makes the “employee” “appropriately trained and qualified”. The “employee” should be trained in USPAP and required to operate under the Ethics Rule with in USPAP just as any appraiser would be required to do.

Higher education in the areas of appraisal for lenders is supported and encouraged.

The agreement should require the “employee” to be an actual agent of Fannie Mae or Freddie Mac and hence instating agency or fiduciary duties. This would require replacement wording with in the Home Valuation Code of Conduct similar to that as found in the recently passed Washington State legislation SB-6381 requiring lenders to hold fiduciary relationships with borrowers. More can be learned about Washington State bill via Rain City Guide post titled Mortgage Brokers and Loan Originators Will Owe Fiduciary Duties to Consumers by Jillayne Schlicke.

Section VI Sub Section 1 through 6 – Opening paragraph

In underwriting a loan, the lender shall not utilize any appraisal report prepared by an appraiser employed by:

1) The lender

2) An affiliate of the lender

3) An entity that is owned, in whole or in part, by the lender

4) An entity that owns, in whole or in part, the lender

5) A real estate “settlement services” provider as per RESPA

6) An entity that is owned, in whole or in part, by “settlement services” provider

The lender also shall not use any appraisal report obtained by or through an appraisal management company that is owned by the lender or an affiliate of the lender – 20% or more

Section VI Plus Points

Section VI ensures safe guards against appraiser pressure.

Section VI Con Points

This section will require the sell off of companies or major portions to the point were management and employees could be affected. The section hampers company ownership, investor’s involvement and a company’s ability to diversify holdings.

Section VI is similar to the above sections and applies heavy potential to the establishments of selection systems as noted in H.R. 1723.

Apella’s View – No Support For Section VI

While it is supported that appraisers and appraisal management companies should not be pressured to meet property values or conditions, ownership rights should not be limited or prohibited. Nor should selection systems be considered as they limit competition with in the appraisal industry.

Section VII – Opening paragraph

“The lender will establish a telephone hotline and an email address to receive any complaints from appraisers, individuals, or any other entities concerning the improper influencing or attempted improper influencing of appraisers or the appraisal process”

“Within 72 hours of receiving any complaint, the lender will begin a preliminary investigation of the complaint and upon completing the inquiry (or, after a period not to exceed 60 days. Whichever shall come first) shall notify the Independent Valuation Protection Institute and any relevant regulatory bodies of any indication of improper conduct.”

Section VII Plus Points

Section VII addresses the need of appraisers to have a secure method of filing complaints for pressure as there is no well suited method available. This section allows for the problem of predetermined values and appraiser pressure to be traceable and/or recorded.

Section VII Con Points

Cost of new regulations will make the appraisal and loan process more expensive for the mortgage broker and general consumer. Maintaining the system will take cost that will most likely be supplied by fees and fines.

H.R. 3837 (f) (FIRREA) proposes fee increases from appraisal license renewals from the current $25-$50 fees to $40-$80. Operation for the Independent Valuation Protection Institute will most likely be collected in the same matter. These fees will increase the cost of appraisals and/or operations by lenders. Furthermore the establishments of such a complaint system will most likely increase errors & omissions insurance cost for professionals.

Section VII does not cover penalties for those that violate the Home Valuation Code of Conduct.

Apella’s View – Support For Section VII With Major Modifications

In many states there are no laws that require lenders to abstain from appraiser pressure. As well many states do not require lenders to be licensed. This main fact has been a major issue for appraisers and the appraisal industry when working to correct the issue of appraiser pressures at the state level.

The states have very limited funds and resources as it is in their attempts to control licensing regulations and laws. In many states processing of complaints can take anywhere from six months to three years. This section poses to add stress and burden to an already taxed regulatory system. The 24 million dollars needs to be increased with states receiving portions to fund departments that can transfer complaints to departments on federal levels when violations fall under H.U.D., RESPA, FDIC or other including state occupational licensing and consumer laws.

Appraiser pressure needs to be perceived as Mortgage Fraud, which is a federal offence. While the State of New York has no control over the making of Federal law, as well as Fannie Mae and Freddie Mac, there are federal laws already in place that could be used, such as, mortgage fraud, securities fraud and mail/wire fraud. Seventy two hours and 60 days are unlikely time frames. As the Independent Valuation Protection Institute holds no regulatory enforcement abilities and is no more then a processing center it is sure that the 24 million can be spent more productively.

Section VIII – Opening paragraph

The lender agrees that it shall quality control test, by use of retroactive or additional appraisal reports or other appropriate method, of a randomly-selected 10 percent (or other bona fide statistically significant percentage) of the appraisals or valuations which are used by the lender. Including the results of automated valuation models, broker’s price opinions or “desktop” evaluations. The lender shall report the results of such quality control testing to the Independent Valuation Protection Institute and any relevant regulatory bodies.

Section VIII Plus Points

Section VIII supports systems already in place ensuring reviews are preformed and quality is monitored.

Section VIII Con Points

Section VIII departs from the standard 1 in 5 (20%) appraisal reviewed by banks (present standard), while requiring mortgage brokers to have appraisals reviewed as banks are currently required. This will increase cost on the mortgage industry for operational areas and regulatory compliance.

Automated Valuation Models (AVM’s) do not personally inspect property and real estate brokers/agents are not appraisers.

Reporting such findings to the Independent Valuation Protection Institute does not ensure the quality of mortgage portfolios or properly allow for ratings systems. It does collect data to produce AVM’s.

Section VIII does not require that the consumer/borrower be notified that the appraisal may be reviewed in the future.

Apella’s View – Support For Section VII With Major Modifications

Section VIII should be modified to allow reviews by appraisers who do actual from the street reviews of the subject property. Automated Valuation Models and real estate brokers /agents are not required to perform as appraisers, are not licensed as appraisers and are not required to take into consideration USPAP let alone comply with USPAP. By allowing the appraisals and mortgage portfolios to be reviewed by non-appraisal systems, standards, educational requirements and guidelines findings will not be consistent and/or for portfolio management/rating(s).

Section IX – Opening paragraph

Any lender who has a reasonable basis to believe an appraiser is violating applicable laws, or is otherwise engaging in unethical conduct, shall promptly refer the matter to the Independent Valuation Protection Institute and to the applicable state appraiser certifying and licensing agency.

Section IX Plus Points

Section IX supports systems already in place at state levels.

Section IX Con Points

Section IX – see Section VII

Apella’s View – Support For Section VII With Major Modifications

Section IX is duplicated for systems already in place at state levels as mandated by FIRREA and most state’s occupational codes, licensing laws and consumer laws. See Apella’s View Section VII.

Section X – Opening paragraph

The lender shall certify, warrant and represent that the appraisal report was obtained in a manner consistent with this Code of Conduct.

Section X Plus Points

None noted for Section IX.

Section X Con Points

Section X does not state how this is to be done or what will happen if it is not done. Section X further adds to cost of operations for lenders.

Apella’s View – No Noted Support For Section X

Section X does not give enough details for Apella to hold a view and it is requested that this area of the Home Valuation Code of Conduct be revisited by the agreeing parties.

Section XI was not included as it is standard language for most governmental items in relation to appraisals.

Apella’s View In Closing

It must be clearly stated that the Home Valuation Code of Conduct lacks reference to any existing laws or regulations, having been already established by H.U.D./Fair Housing, RESPA, and F.D.I.C./Truth In Lending / Equal Credit Opportunity Act, FIRREA, or USPAP, state occupational codes and/or consumer laws. Also the Code lacks the definition as to what an appraisal is and requirements for federally related loans. The Code of Conduct lacks required lender/mortgage licensing (H.R. 1295) and/or registration and does not clearly state that it only holds for loans/appraisals being purchased by Fannie Mae and/or Freddie Mac. The code does not state the effect that it may hold on other secondary market buyers. 

Readers should note that a follow up post will follow with further insight and findings of reviews to this post. 

Until the next post, thank you for reading and please share your views with much thanks in advance.

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