Monday, June 7, 2010

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.


  1. Hvcc promotes redling

  2. I just came to your post and reading above thing it is very impressive me and it is very nice blog. Thanks a lot for sharing this.

  3. Hello Dude,

    As part of the financial regulatory reform bill which has yet to pass the house and senate, lawmakers put the future of the HVCC in the hands of federal regulators to decide if the ban on reverse mortgage loan officers and brokers selecting appraisers should be continued. Thanks a lot...