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The home valuation code of conduct and its potential impacts.

ABSTRACT

The Home Valuation Code of Conduct (HVCC) is a new part of the Fannie Mae and Freddie Mac Selling Guides. it is the result of a private agreement between New York Attorney General Cuomo. the Federal Housing Finance Agency, Fannie Mae, and Freddie Mac. The code could change the appraisal industry and the real estate industry as well as banking practices. This article examines the background of the original proposal and the objections raised by appraisal, banking, and real estate interests. The final HVCC provisions are summarized and the remaining areas of concern are examined. Readers are cautioned that this situation continues to evolve, and they should consult government and association Web sites for the latest updates.

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The real estate industry has suffered the worst outbreak of mortgage fraud and residential loan losses in twenty years. The percentage of one-to-four unit residential mortgage loans in the foreclosure process is the highest recorded since 1979. FBI mortgage fraud suspicious activity reports grew from 3,245 in 2000 to 46,717 in 2007 (Figure 1). (1)

Residential mortgage fraud has been widely covered in the press. According to LexisNexis, there were 282 U.S. newspaper and wire stories on "mortgage fraud" in 2004, almost 1,600 in 2007, and 1,691 stories from January I to August 8, 2008 (Figure 2). Many mainstream media stories on mortgage fraud discuss problems with the appraisal process.

Arising out of these concerns, a "Home Value Protection Program and Cooperation Agreement" was proposed in March 2008 by New York Attorney General Andrew Cuomo and the Office of Federal Housing Enterprise Oversight (OFHEO). (2) The program was ultimately revised and in its final form adopted as the Home Valuation Code of Conduct (HVCC). Effective May 1, 2009, Fannie Mae and Freddie Mac require lenders to follow the code provisions for all residential mortgages that Fannie Mae and Freddie Mac purchase. The agreement appears to create a de facto national mortgage process through actions by one state official, changing appraisal and lending practices in all states.

This article provides a brief overview of regulations impacting appraisers and external measures of the impact of mortgage fraud on the mortgage crisis. Next, the Home Value Protection Program as originally proposed is examined, and reactions to the program by appraiser professional groups, banking regulators, banking professional groups, and real estate professional groups are presented. Objections to the process and procedures leading to the program as well as reactions to specific provisions from industry groups and regulators are also summarized. Then the final version of the Home Valuation Code of Conduct (HVCC), released on December 23, 2008, is summarized and its strong and weak points discussed. The provisions of the HVCC are also compared to those of the revised Regulation Z. Finally, recommendations are presented.

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Background

The last major wave of mortgage fraud occurred in the 1980s. It was associated with the savings and loan crisis and resulted in significant changes in appraisal standards and banking regulations. A U.S. General Accounting Office report on twenty-six failed thrifts from the savings and loan crisis found that 88% of their total loans had been made on the basis of inadequate appraisals or appraisal fraud. (3) These abuses resulted in the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). FIRREA and subsequent regulations led to the establishment of national appraisal standards embodied by the Uniform Standards of Professional Appraisal Practice (USPAP). The Appraiser Qualifications Board (AQB) of the Appraisal Foundation was also established to promote minimum requirements for state certification of appraisers.

Federal banking regulations enabled by FIRREA require federally related transactions to adhere to specific appraisal standards, including compliance with USPAP. The Interagency Appraisal and Evaluation Guidelines; the Comptrollers Handbook: Commercial Real Estate and Construction Lending; and Frequently Asked Questions on the Appraisal Regulations, and the Interagency Statement on Independent Appraisal and Evaluation Functions provide specific appraisal process standards that must be followed by federally regulated lenders. (4)

Although the details of these federal banking regulations are beyond the scope of this article, some of the most important appraisal standards deserve a brief mention. They provide that the appraisal function must be separate and independent from the loan production, investment, and collection functions. Appraisal quality control must be independent of the loan production staff. Lenders may not accept borrower-ordered appraisals or allow borrowers to select an appraiser. The appraisal must be in writing and the appraiser must sign the certification page of the report. The appraiser also can have no direct or indirect financial interest in the property or transaction. These appraisal standards must be incorporated into lenders' control procedures and are part of regulators' bank examinations.

The savings and loan crisis of the 1980s occurred in an environment without USPAP, with little federal regulation of lender appraisal standards, and with generally weak state licensure requirements for appraisers. Prior to passage of FIRREA, professional organizations such as the American Institute of Real Estate Appraisers and the Society of Real Estate Appraisers (predecessors to the Appraisal Institute), served as the standard bearers of quality in the appraisal profession. Organizations such as these maintained and governed a set of standards of professional practice and enforced the requirement that membership of the organizations practice ethically. However, these groups had no authority over those who were not members.

There are many types of mortgage fraud. Individuals may file false loan applications. Loan officers may falsify escrow or closing documents. There may be fraudulent appraisals in property flipping. BasePoint Analytics reported that 20% of mortgage fraud involved occupancy fraud, where borrowers falsely claim they intend to live in a property. (5) Poor underwriting standards enable applicants to falsely claim high incomes and asset levels. Appraisal fraud exists, and sometimes occurs when lenders pressure appraisers to hit a target number. However, data indicate the current mortgage fraud crisis was primarily driven by application fraud and weak underwriting standards, not appraisal issues.

Original Home Value Protection Program and Cooperation Agreement

On November 7, 2007, New York Attorney General Cuomo subpoenaed Fannie Mac and Freddie Mac for an enormous amount of information on residential loans purchased from Washington Mutual. James Lockhart, then Director of the Office of Federal Housing Enterprise Oversight (OFHEO), initially sought to block the subpoena. But in January 2008, Senator Charles Schumer, a senior Democrat on the committee overseeing the OFHEO, issued a letter pressuring OFHEO to cooperate with the Cuomo probe.

On March 3, 2008, Cuomo and Lockhart announced a "Home Value Protection Program and Cooperation Agreement" with Fannie Mac and Freddie Mac. The program included provisions to establish a "Home Value Protection Code" and to form an "Independent Valuation Protection Institute" Fannie Mac and Freddie Mac agreed that only loans following the code would be purchased after January 1, 2009. It is interesting to note that, by agreeing to the program, Fannie Mac and Freddie Mac ended Cuomo's burdensome investigation by shifting focus to the overall appraisal industry (not specific to Washington Mutual) and passing the primary burden to the mortgage banking industry.

Comments on the agreement were sought from interested parties from March 14, 2008 to April 30, 2008, a period of only forty-eight days. Numerous comments on the code and institute were submitted; a detailed timeline of the events is provided in Table 1.

Reactions to the Home Value Protection Program and Cooperation Agreement

Many appraiser professional groups, state and federal regulatory bodies, banking professional groups and real estate professional groups commented on the original program. Some groups requested the program be dropped. Some were supportive of the underlying intent, but voiced very strong concerns about unintended consequences arising from the program, including actual declines in appraisal quality. Other groups recommended modification of specific elements of the program. Many federal financial regulatory groups, including the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Office of Thrift Supervision, and National Credit Union Administration recommended withdrawal of the program. The Federal Deposit Insurance Corporation and a group of Federal Trade Commission staff thought the program should be retained but modified.

Almost all banking professional groups thought the program should be withdrawn. Among real estate professional groups there was a split of opinion. The National Association of Realtors and the National Association of Home Builders urged program modification, while the National Association of Mortgage Brokers thought the program should be withdrawn.

Table 2 provides the specific stances of twenty-five major federal regulatory bodies and industry professional groups on the Home Value Protection Program. Criticisms of the original program generally fell into three areas: procedural problems, jurisdictional problems and problems with specific aspects of the proposal; these areas are discussed next.

Procedural and Jurisdictional Objections

Congress has legislated a process that must be followed by federal agencies and others in regulating interstate commerce. The most important law covering this process is the Administrative Procedure Act. This law mandates a comment process before a federal rule is proposed, a comment process after a rule is proposed, and specific criteria that a proposed rule must consider before being finalized. In their objections to the Home Value Protection Program, the Comptroller of the Currency, the Board of Governors of the Federal Reserve, the Office of Thrift Supervision, the National Credit Union Association, and nine banking professional associations stated that the OFHEO and the New York Attorney General's Office failed to follow the requirements of the Administrative Procedure Act in a proposal regulating interstate commerce. In addition, they stressed that the comment period was very short, and initially there had been no meaningful consultation with professional groups or federal regulators (other than the OFHEO) in development of the program.

The Comptroller of the Currency made a detailed rebuttal to the proposed program and referenced numerous court cases to show that the OFHEO and the New York Attorney General lacked jurisdiction to regulate banks engaged in interstate commerce. Nine banking professional associations also claimed that the New York Attorney General lacked jurisdiction over federal banks and bank regulations. The New York Attorney General, in turn, claimed jurisdiction through the Martin Act, a piece of state legislation passed in 1921 and codified in New York General Business Law. (6) The Martin Act grants authority to the Attorney General of New York to investigate suspected cases of fraud in stocks, bonds, and other securities (which might be interpreted to include mortgage-related securities).

Questions about the process used to impose rules on interstate commerce and the jurisdiction to issue banking regulations are not esoteric. Several battles between the Comptroller of the Currency and the New York Attorney General's Office (under both Cuomo and his predecessor, Eliot Spitzer) have been litigated. The Comptroller of the Currency has won court cases protecting its right to preempt state attempts to affect national bank operations. (7) According to American Banker, the Comptroller of the Currency's letter "provides a road map for any lender weighing a lawsuit" on jurisdiction. (8) Table 3 summarizes the procedural and jurisdiction objections of entities commenting on the proposed program.

Specific Code and Program Objections

Objections raised by professional associations and regulators to specific elements of the Home Value Protection Program ranged from minor wording suggestions to requests to eliminate entire sections of the program. Table 4 summarizes the objections to program specifics. Although the table is not a comprehensive list, it does illustrate the broad opposition to many elements of the original Cuomo/OFHEO plan.

Many appraiser professional associations, banking professional associations, federal regulators, and real estate professional associations objected to the originally proposed ban on appraisers working in-house for lenders. Many pointed out that in-house appraisers working for lenders are insulated from loan production by existing banking regulations, that in-house appraisers generally are very conservative, and that no widespread problems had been attributed to in-house appraisers. The objection to a ban on in-house appraisers working for lenders was the most widely voiced concern across all industry and regulatory groups.

Appraiser professional associations also objected to the increased use of appraisal management companies encouraged by the program as it was originally proposed. The Appraisal Institute, the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers recommended that appraisal costs and appraisal management fees be reported separately to buyers on both good faith estimates and closing statements. These same appraiser groups, along with the National Association of Realtors, opposed the original program's incentives for substituting automated valuation models and broker price opinions for appraisals.

Many appraiser professional associations, banking professional associations, federal regulators, and real estate professional associations thought that the adoption of the program would cause massive disruptions in loan underwriting procedures. They were especially concerned about possible disruptions due to the weakness in the housing and mortgage markets. Banning mortgage brokers from ordering appraisals when appraiser independence and program oversight were present was opposed by appraisal professional associations, federal regulators, and the National Association of Mortgage Brokers.

Banking professional associations, federal regulators, and real estate professional associations, such as the National Association of Mortgage Brokers, expressed concern that the program would raise mortgage origination costs and consumer costs. These groups also thought that the program would establish a redundant set of national appraisal rules. Many also thought the new rules contradicted elements of existing banking laws and regulations.

The Home Valuation Code of Conduct After receiving numerous comments on the Home Value Protection Program, on December 23, 2008 the Federal Housing Finance Administration (FHFA) released a substantially revised version, the Home Valuation Code of Conduct (HVCC). The HVCC provisions took effect on May 1, 2009. The biggest single revision is that the code allows appraisers employed by lenders to conduct appraisals, order appraisals, and review appraisals as long as the appraiser does not report to the lenders' sales or loan production function. The in-house appraisers are required to follow all aspects of the code.

The Home Valuation Code of Conduct provisions address appraiser independence and protection against undue influence. Since the HVCC applies to those mortgage originators who sell loans to Fannie Mae and Freddie Mac, the burden for compliance is placed on those lenders. If the lenders fail to comply or violate the HVCC provisions, they face the risk of mandatory loan buybacks.

The final Home Valuation Code of Conduct contains nine sections. Section I of the HVCC sets forth "Appraiser Independence Safeguards" This initial section is divided into three subsections. The first, Subsection A, requires that appraisers be licensed or certified in the state in which the property to be appraised is located. Subsection B enumerates prohibited conduct that might unduly influence the development of a value estimate. This subsection lists expressly forbidden actions by lenders (including their employees, directors, officers or designated agents), appraisal management companies, or other third parties acting on behalf of the lenders. Prohibited conduct includes withholding and threatening to withhold future business or timely payment of fees. Promising future business, increased compensation, or alternative forms of compensation in return for reaching a value estimate are also prohibited. Lenders and those acing on behalf of lenders may not request a value estimate prior to the completion of an appraisal report and may not provide an appraiser with an anticipated value estimate. Appraisers cannot be removed from the list of qualified appraisers without prompt written notice that includes written evidence of illegal conduct, violation of USPAP or state licensing standards, substandard performance, or improper behavior. The ordering of a second or subsequent appraisal is also banned except when it is part of an appraisal review or when there is a reasonable belief that the initial appraisal is flawed. Subsection C allows lenders to request additional supporting documentation from an appraiser for explanatory purposes or to request correction of factual errors by the appraiser.

As an additional protection to borrowers, Section II, "Borrower Receipt of Appraisal," mandates that the lender provide a copy of the appraisal to the borrower at no additional charge immediately upon completion of the report, and no less than three days prior to loan closing. This time limit may be waived by the borrower. This provision does allow lenders to obtain reimbursement from borrowers for the cost of the appraisal.

According to Section III, "Appraiser Engagement," only the lender or its authorized third party (such as an appraisal management company or corresponding lender) can select, retain, or compensate the appraiser. Lenders cannot accept appraisals selected, ordered, or compensated by any other third party, including mortgage brokers or real estate agents. This sections does not, however, prevent a lender from using an appraisal report prepared for another lender as long as the lender "obtains written assurances" that the original lender has followed the code in connection with the loan being originated and the appraisal otherwise conforms to the new requirements.

There are two additional subsections in the appraiser engagement section that deal with ensuring appraiser independence within the lender's staff. The lender's loan production staff or anyone else compensated through commissions contingent upon the completion of a loan cannot participate in appraiser selection, review, or management functions. Also employees of the lender (including employees of any appraisal management company retained by the lender) "tasked with selecting appraisers" and reviewing appraisal reports "must be appropriately trained and qualified in the area of real estate appraisals."

Section IV, "Prevention of Improper Influences on Appraisers," dictates that in underwriting a loan lenders cannot use any appraisal report prepared by an appraiser employed by the lender, a lender affiliate, or an entity in which it has an ownership interest. Subsection B of this section provides an exception where the appraiser reports to a function of the lender independent of the lender's sales or loan production. The subsection also prohibits members of the lender's sales and loan production staff from having direct contact with the appraiser or having any hand in the selection process. Also prohibited are disclosures to the appraiser of a targeted value or loan amount (a copy of a sales contract may be provided). Subsection C of Section IV deals directly with real estate settlement service firms and clarifies that such entities may prepare appraisal reports as long as they have adopted policies and procedures implementing the code. (9) Subsection D, clarifies the appropriate use of in-house appraisers. This subsections permits lenders to use in-house appraisal staff to order and review appraisals (both pre- and post-funding) as well as to provide appraisals for reasons other than loan funding, such as loan workouts. Subsection E provides an exception applicable to "small banks," to prevent an undue burden on institutions that might not have the ability, due to size, to meet the provisions of the code.

Section V of the Home Valuation Code of Conduct creates of the Independent Valuation Protection Institute (IVPI). This section states that the IVPI will establish a telephone and e-mail hotline to receive confidential complaints from appraisers, individuals, and entitles that believe there has been improper influence on an appraiser or the appraisal process. It also mandates that the IVPI publish materials promoting "best practices in the area of independent valuation."

The final four sections of the code are brief descriptive provisions. Section VI, "Appraisal Quality Control Testing," states that lenders must perform random quality control testing of ten percent (or some other statistically significant percentage) of appraisal reports that they use. If the control testing finds noncompliance with the code, then Fannie Mae or Freddie Mac may require the lender to repurchase mortgages.

An important provision in the revised version of the code is found in Section VII, "Referrals of Appraisal Misconduct Reports" This section requires lenders that suspect an appraiser or appraisal management company is violating any applicable law or engaging in unethical practice to refer the matter to the appropriate state appraiser agency or other appropriate regulatory authority.

Section VIII, "Representations and Warranties," requires that lenders certify that the appraisal report for each loan was obtained in a manner consistent with the code. The final section, Section IX of the HVCC, clarifies the scope of the code. This section states that the code does not require any particular method of valuation, does not affect the scope of work for an assignment, and does not require an action prohibited by state or federal law.

Implications of the Home Valuation Code of Conduct

The appraisal, banking, and real estate industries could be profoundly changed by the Home Valuation Code of Conduct. In the 2008 first quarter, Fannie Mae and Freddie Mac securitized or made direct loan purchases for more than 70% of all residential mortgages. (10) Consequently, the HVCC may become a de facto standard governing the residential appraisal process and ultimately the driving force in the appraisal market.

There are a number of concerns remaining regarding the code. For example, it is likely that fewer residential appraisals will be ordered, and appraisers may find they have lost significant work volume. It will be far more difficult to order a second supporting appraisal. (There are exceptions to this, including where the lender can demonstrate the initial report was flawed or tainted.) Also, there may be downward pressure on appraisal fees when Fannie Mae and Freddie Mac stop purchasing loans from banks not following the code.

Another point of concern is the absence of a road map or set of rules as to how the HVCC will be implemented. At present, issues are addressed in a general manner, which does not provide a clear understanding of the exact nature of the code. Questions and the resulting answers on implementation, oversight, and enforcement are still evolving. As such, any clearly defined outcomes may remain unknown for some time.

The Home Valuation Code of Conduct sets up standards specific to Fannie Mae and Freddie Mac. The costs of this parallel process will include funding of the Independent Valuation Protection Institute, which may increase consumers' mortgage costs. Also, as the federal regulators and banking professional associations have commented, setting up a parallel set of standards for certain appraisals will cause confusion. Any differences between current federal banking regulations and the HVCC will have to be reconciled.

The final HVCC does not address any of the jurisdictional and procedural objections to the original program. The precedent of Cuomo's intervention poses a significant danger to appraisers, financial institutions, and the real estate industry. If the Attorney General of New York can impose national standards of appraisal and banking practice, what prevents another attorney general from imposing regulations on these industries? It is helpful to remember the evolution of these proposals. There was a major problem with one bank--Washington Mutual. Cuomo subpoenaed a massive number of documents and launched an investigation of Fannie Mae and Freddie Mac. Then, an agreement among the parties imposed de facto national regulations affecting others (appraisers and federal banks) that were not targets of the initial investigation and subpoenas. These actions set a national precedent than any state's attorney general can form binding agreements regulating the real estate industry and banking for the entire nation.

There may be litigation if Fannie Mae and Freddie Mac stop purchasing residential mortgages from banks not following the code. In the past, a U.S. Court of Appeals ruled that the New York Attorney General did not have the authority to investigate the mortgage lending practices of national banks or their operating subsidiaries. (11) At the time the New York Attorney General's agreement with Fannie Mae and Freddie Mac was proposed, three different groups indicated a willingness to litigate the issue. These groups include the Comptroller of the Currency, the National Association of Mortgage Brokers, and a group of seven banking professional associations. (12)

The final code appears to worsen two problems. First, the code repeatedly equates the use of automated valuation models with prepared appraisals. Appraisals and automated valuations are discussed jointly in terms of appraisal reports. This is done both for original appraisal reports and for quality control tests. Section VI on quality control testing, for example, groups together "appraisals or valuations that are used by the lender, including the results of automated valuation models, broker's price opinions, or 'desktop' evaluations." Although the code specifically states that lenders are not required "to use any particular method for property valuation (such as an appraisal or automated valuation model)," by repeatedly and specifically pairing automated valuation models with appraisal reports it strongly signals that they are considered equivalent methods of property valuation. Given the cost advantages of automated valuation models, the code may prod lenders to favor them over appraisals.

Second, the funding and procedures of the Independent Valuation Protection Institute continue to be unclear. Even as the code went into effect there was scant evidence of progress on implementing and funding the IVPI. Critics of the initial proposal thought the expense of the IVPI would raise mortgage loan origination costs, and this concern remains. The final code merely specifies that the IVPI "shall be created as approved by the parties." This statement is difficult to interpret. While the makeup and responsibilities of the IVPI were vague in the original agreement, in the final code details are nonexistent. Who will pay to set up and maintain the IVPI? What are the costs? Who has appointment power? What qualifications are needed for its decision makers? How will it make internal decisions?

In the original proposal, violations would have been reported to the Attorney General of New York, Fannie Mae and Freddie Mac, and appropriate federal and state law enforcement agencies. In the final code, the appraisal complaints and reports are to go to the Independent Valuation Protection Institute as well as the applicable state licensing body. For this reason, the individuals within the institute, the selection criteria for members of the institute, and policies and procedures of the institute are of critical importance to the lending and appraisal industries. Also, the final code grants the IVPI the power to publish and promote "best practices for independent valuation" (Section V). This clause seemingly gives the IVPI the power to decide which appraisal methods are acceptable, backed by the market power of Fannie Mae and Freddie Mac.

Legal Risk for the Appraisal Profession

The Home Valuation Code of Conduct provides that borrowers must be given a copy of the appraisal report no less than three days prior to the closing of the loan. Unfortunately, many buyers are inexperienced and may not fully understand the appraisal report. Buyers may also believe that the appraisal report was generated for them and that the appraiser works for the buyer, not the lender. The Appraisal Foundation has recognized this problem and suggested that lenders be required to attach a prominent notice to appraisal reports provided to buyers. The notice would inform the buyer that the buyer is not the intended user of the report, that the buyer may not understand the report, that the appraiser may have limited or no liability to the borrower, and that the appraisal report is for informational purposes only. (13)

Although the Appraisal Foundation's recommendation of attaching a notice to the buyer's copy of the appraisal report is sound, many state court cases have established that appraisers may be held liable to third parties who did not order the appraisal. (14) Although third-party liability for appraisers does not hold in every state, providing a copy of the appraisal report to relatively uninformed buyers before the loan closing makes the appraiser a potential target for any subsequent claims by a dissatisfied buyer. If the code exposes appraisers to more lawsuits, appraisers' business insurance costs will rise.

Changes in Regulation Z Affecting Appraisal Practice

The Home Valuation Code of Conduct may, in fact, be unnecessary. Regulation Z implements the federal Truth in Lending Act, and in 2009 the Board of Governors of the Federal Reserve System adopted a final rule strengthening safeguards under Regulation Z. (15) Unlike the original Cuomo/OFHEO proposal, Regulation Z changes were developed with lengthy public comment. The rule references specific authority granted by Congress to adopt regulations prohibiting unfair or deceptive acts or practices involving mortgage loans. Revised Regulation Z addresses the conduct of lenders and mortgage brokers, and applies to all federally insured depository institutions, not just loans purchased by Fannie Mae or Freddie Mac.

Revised Regulation Z bans any coercion of appraisers to misstate or misrepresent the value of a consumer dwelling. Coercion includes implying that current or future appraisal work depends on the value an appraiser places on a dwelling; excluding an appraiser from future work because a value does not meet or exceed a minimum threshold; telling an appraiser a minimum value for a dwelling; failing to pay an appraiser for not hitting a target value; and conditioning appraiser compensation on loan consummation. However, revised Regulation Z allows asking an appraiser to consider additional information about a dwelling or comparable properties; requesting an appraiser to provide additional information about the basis for a valuation; and obtaining multiple appraisals as long as the appraisal ultimately selected is the most reliable rather than the appraisal with the highest value. (16)

Summary and Recommendations

It is widely recognized that real estate appraisers have faced coercion and intimidation from mortgage brokers and loan originators. Many concerns raised by the New York Attorney General regarding coercion of appraisers are addressed in revised Regulation Z. The jurisdictional and process concerns raised by the HVCC or its predecessor do not apply to the actions by the Board of Governors of the Federal Reserve in Regulation Z. In addition, Regulation Z does not ban additional appraisals or equate appraisals with automated valuation models. Regulation Z also does not raise the specter of one state's attorney general regulating the national real estate industry or national banking practices. For these reasons, the HVCC is not the appropriate response to the concerns related to lender pressure on appraisers.

There are other laws in addition to Regulation Z that address lender conduct. In 2008, H.R. 3221 [110th] was signed into law, Title V of the Housing and Economic Recovery Act of 2008, which includes the S.A.F.E Act or "Secure and Fair Enforcement for Mortgage Licensing Act of 2008." This act establishes new requirements for the licensing, renewal, and regulation of the mortgage brokerage industry. The act is designed to encourage states to establish a nationwide mortgage originator licensing system and official registry for the residential mortgage industry. The stated purpose of these new regulations is to increase the uniformity of residential mortgage loan origination and increase consumer protection, while reducing incidents of mortgage fraud.

One important issue raised by the recent discussions still deserves careful consideration. Although appraisers and lenders are generally familiar with the state and federal regulatory entities handling complaints of mortgage fraud and coercion of appraisers, the general public is largely ignorant of this process. Currently, there is no single source consumers can turn to when coercion of appraisers or appraisal fraud is suspected. Establishing a national complaint hotline could simplify this process for consumers. Consumers could send complaints to one source and those complaints would be forwarded to the proper authorities. The national complaint hotline could include a Web site, phone number, and e-mail address and could be established within the framework of existing organizations. Establishing this national hotline would not require a new regulatory agency or authority. Setting up and publicizing the hotline's services could be of real benefit to consumers as well as the appraisal profession.

Web Connections

Internet resources suggested by the Lum Library

Appraisal Institute, Home Valuation Code of Conduct--Latest Updates

http://www.appraisalinstitute.org/newsadvocacy/cuomofanniefreddie.aspx

Fannie Mae Appraisal Resources

https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/

Federal Housing Finance Agency Home Valuation Code of Conduct News Release

http://www.fhfa.gov/webfiles/277/HVCC122308.pdf

Freddie Mac Home Valuation Code of Conduct Information

http://www.freddiemac.com/singlefamily/home_valuation.html

National Association of Realtors, Home Valuation Code of Conduct-Latest News and News Resources

http://www.realtor.org/government_affairs/gapublic/gses_hvcc_announced

Bibliography

Alabama Real Estate Appraisers Board letter to Alabama Attorney General Troy King, April 1, 2008.

American Bankers Association, American Financial Services Association, Consumer Bankers Association, Consumer Mortgage Coalition, Housing Policy Council, The Financial Services Roundtable, Independent Community Bankers of America, Mortgage Bankers Association, and the Real Estate Services Providers Council letter to James Lockhart, Director of Office of Federal Housing Enterprise Oversight, April 30, 2008.

The Appraisal Foundation letter to Freddie Mac, April 29, 2008.

Appraisal Institute. "Fact Sheet." March 2008. http://www.appraisalinstitute.org/newsadvocacy/ cuomofanniefreddie.aspx.

Appraisal Institute, American Society of Appraisers, American Society of Farm Managers and Rural Appraisers, and National Association of Independent Fee Appraisers letter to Fannie Mae, April 30, 2008.

Comptroller of the Currency letter to the Office of Federal Housing Enterprise Oversight, May 27, 2008.

Dugan, John C., Comptroller of the Currency, letter to James Lockhart, Director of the Office of Federal Housing Enterprise Oversight, May 27, 2008.

Federal Deposit Insurance Corporation letter to James Lockhart, Director of the Office of Federal Housing Enterprise Oversight, June 20, 2008.

Federal Housing Finance Agency. "FHFA 'Notice of Establishment' Sent to the Federal Register" News release, September 4, 2008. http://www.fhfa.gov/GetFile.aspx?FileID=36.

Federal Housing Finance Agency. "Home Valuation Code of Conduct." December 23, 2008.

Federal Housing Finance Agency. "Statement of Director James B. Lockhart on the Creation of FHFA." July 30, 2008. http://www.fhfa.gov/ webfiles/24/gsesign.pdf.

Federal Reserve System. "Final Rule and Official Staff Commentary on Regulation Z: Docket No. R-1305." 12 CFR Part 226, 2008.

Federal Trade Commission staff members of Office of Policy Planning and Bureau of Economics letter to Freddie Mac, April 30, 2008.

Kroszner, Randall S., Governor of the Board of Governors of the Federal Reserve System; John M. Reich, Director of Office of Thrift Supervision; John C. Dugan, Comptroller of the Currency; and JoAnn M. Johnson, Chairman of the National Credit Union Administration letter to James Lockhart, Director of the Office of Federal Housing Enterprise Oversight, June 19, 2008.

National Association of Home Builders letter to Freddie Mac, April 30, 2008.

by Avery M. Abernethy, PhD, and Harris Hollans, PhD, MAI

(1.) Merle Sharick, Jennifer Butts, Michelle Donahue, and Nick Larson, Tenth Periodic Mortgage Fraud Case Report to the Mortgage Bankers Association (Mortgage Asset Research Institute, March 2008), http://www.mbaa.org.

(2.) At the time, the OFHEO existed as an independent regulatory agency with oversight of Fannie Mae and Freddie Mac. In July 2008, the Federal Housing Finance Agency (FHFA) was formed by a legislative merger of the Office of Housing Enterprise Oversight, the Federal Housing Finance Board, and the U.S. Department of Housing and Urban Development government-sponsored enterprise (GSE) mission team. The FHFA regulates Fannie Mae, Freddie Mac, and the twelve Federal Home Loan Banks. Public guidance on the persistence of prior regulatory orders has been issued, stating that "all existing regulations, orders, and decisions of OFHEO and the Finance Board remain in effect until modified or superseded."

(3.) ABA Banking Journal, "FIRREA Amendment Reappraises Appraisers" (November 1989): 20-24.

(4.) Comptroller's Handbook: Commercial Real Estate and Construction Lending, Appendix E, Office of the Comptroller of the Currency (October 27, 1994); Frequently Asked Questions on the Appraisal Regulations and the Interagency Statement on independent Appraisal and Evaluation Functions, SR Letter 05-5, Board of Governors of the Federal Reserve System (March 22, 2005); and Interagency Appraisal and Evaluation Guidelines, SR letter 94-55 (FIS), Board of Governors of the Federal Reserve System (October 28, 1994).

(5.) Ruth Simon and Michael Corkery, "Speculators May Have Accelerated Housing Downturn," Wall Street Journal, February 6, 2008.

(6.) Article 23-A, Sections 352-353.

(7.) John C. Dugan, Comptroller of the Currency, letter to James Lockhart, Director of the Office of Federal Housing Enterprise Oversight, May 27, 2008; and Cheyenne Hopkins, "In Focus: Some Fear Precedent Set by Cuomo-GSE Agreement," American Banker 173, no. 47 (March 10, 2008): 4.

(8.) Cheyenne Hopkins, "Appraisal Deal Draws Protest from OCC; Letter to OFHEO Seen as Potential Fodder for Courtroom Fight," American Banker 173, no. 102 (May 28, 2008): 1.

(9.) Settlement services include title searches, title examinations, title certification, title insurance, services rendered by an attorney, preparation of documents, property surveys, rendering of credit reports or appraisals, pest and fungus inspections, services of a real estate agents or brokers, and loan origination and processing. 12 U.S.C. [section]2602.

(10.) Dugan, May 27, 2008.

(11.) The Clearing House Association v. Cuomo, 05-5996-cv; and Office of the Comptroller of the Currency v. Cuomo, 05-6001-cv (2nd Cir. December 4, 2007).

(12.) Dugan, May 27, 2008; National Association of Mortgage Brokers, "NAMB Issues Statement on Mortgage Appraisal Agreement," March 3, 2008, http://www.namb.org.; and American Bankers Association, American Financial Services Association, Consumer Bankers Association, Consumer Mortgage Coalition, Housing Policy Council, The Financial Services Roundtable, Independent Community Bankers of America, Mortgage Bankers Association, and the Real Estate Services Providers Council letter to James Lockhart, Director of Office of Federal Housing Enterprise Oversight, April 30, 2008.

(13.) The Appraisal Foundation letter to Freddie Mac, April 29, 2008.

(14.) For a review see John D. Benjamin, Paul Chmielewski, and G. Stacy Sirmans, "The Legal Liability of Real Estate Appraisers," The Appraisal Journal (April 1995): 147-154.

(15.) Federal Reserve System, 12 CFR Part 226.

(16.) [section]226.36(b)(1).
Table 1 Timeline of Cooperative Agreement between New York Attorney
General, OFHEO/FHFA, Fannie Mae, and Freddie Mac

November 7, 2007: New York Attorney General Cuomo subpoenas Fannie
Mae and Freddie Mac for loans purchased from Washington Mutual.
Document demands characterized as "enormous" by American Banker.

November 8, 2007: Director of the Office of Federal Housing
Enterprise Oversight (OFHEO) James Lockhart releases response that
he is "disappointed" that New York Attorney General Cuomo did not
seek cooperation from OFHEO. Lockhart seeks to block subpoenas.

November 2007: Fannie Mae and Freddie Mac decide to cooperate with
New York Attorney General's Office.

January 30, 2008: Senator Charles Schumer (D-NY), member of Senate
Banking Committee with oversight of banking and securities
regulators, issues letter urging OFHEO "in the strongest possible
way" to partner with investigation and to be "part of the solution
not part of a perpetuation of the problem."

March 3, 2008: New York Attorney General Cuomo, OFHEO Director
Lockhart, Fannie Mae, and Freddie Mac release the "Home Value
Protection Program and Cooperation Agreement." Comments from
interested parties sought. New York Attorney General's Office
"agrees to terminate its current investigation" of both Fannie Mae
and Freddie Mac.

March 14, 2008: Comment period opens.

April 30, 2008: Comment period closes. Numerous comments are
submitted by federal government financial regulators, appraiser
professional associations, banking professional associations, and
other real estate industry professional associations.

December 23, 2008: Revised Home Valuation Code of Conduct issued by
Federal Housing Finance Agency (successor to the OFHEO).

May 1, 2009: Effective date of the Home Valuation Code of Conduct.
Fannie Mae and Freddie Mac will not purchase single-family mortgage
loans that do not follow the revised code after this date.

Sources: Office of the Attorney General, State of New York, "New
York Attorney General Cuomo Announces Agreement with Fannie Mae,
Freddie Mac, and OFHEO, March 3, 2008,
http://www.oag.state.ny.us/media_center/2008/mar/mar3a_08.html;
Federal Housing Finance Agency, "FHFA Announces Home Valuation Code
of Conduct," press release, December 23, 2008, http://www.fhfa.gov
accessed on February 9, 2009; Cheyenne Hopkins, "Appraisal Deal
Draws Protest from OCC; Letter to OFHEO Seen as Potential Fodder
for Courtroom Fight," American Banker 173, no. 102 (May 28, 2008):
1; and Kara Scannell, "Tensions Rise in Lending Probe," Wall Street
Journal, January 31, 2008.

Table 2 Stances of Interested Parties Commenting on the Home Value
Protection Program and Cooperation Agreement

Appraiser Professional Groups Requesting Program Be Modified:

Appraisal Institute
American Society of Appraisers
American Society of Farm Managers and Rural Appraisers
National Association of Independent Fee Appraisers
The Appraisal Foundation
North Carolina Professional Appraisers Coalition
North Carolina Appraisal Board

Appraiser Professional Groups Requesting Program Be Withdrawn:

Alabama Real Estate Appraisers Board *

Federal Regulatory Groups Requesting Program Be Modified:

Federal Deposit Insurance Corporation

FTC Staff Members in Office of Policy Planning and Bureau of Economics

Federal Regulatory Groups Requesting Program Be Withdrawn:

Comptroller of the Currency
Board of Governors of the Federal Reserve System
Office of Thrift Supervision
National Credit Union Administration

Banking Professional Groups Requesting Program Be Withdrawn:

American Bankers Association
American Financial Services Association
Consumer Bankers Association
Consumer Mortgage Coalition
Housing Policy Council
The Financial Services Roundtable
Independent Community Bankers of America
Mortgage Bankers Association
Real Estate Services Providers Council

Real Estate Professional Groups Requesting Program Be Modified:

National Association of Realtors
National Association of Home Builders

Real Estate Professional Groups Requesting Program Be Withdrawn:

National Association of Mortgage Brokers

Note: Groups calling for the withdrawal counted as being against
the proposal even when specific modifications were also suggested.

* Alabama Attorney General requested that agreement not be applied
within the state of Alabama.

Sources: Comments on proposed program and letters to the Office of
Federal Housing Enterprise Oversight, Fannie Mae, and Freddie Mac;
for full citations see Bibliography.

Table 3 Jurisdictional and Procedural Objections to the Home Value
Protection Program and Cooperation Agreement

Implementation Process Criticisms

Consultations with the Office of Thrift Supervision (OTS) and other
federal banking agencies occurred on an "expedited basis
immediately prior to the formal announcement of the Code and
Agreements." The consultations did not appear to "encourage
meaningful collaboration" with the OTS. (1)

Financial institutions did not have an opportunity to "fully
comment" on the documents or their possible consequences. (1, 2)

No comment period from other interested industry parties prior to
issuance of Home Value Protection Program. (1, 2)

Comment period of only 48 days for interested parties. Fannie Mae
and Freddie Mac opened the comment period on March 14, 2008, and
comment period was subsequently closed on April 30, 2008. (3)

Program and agreement not adopted in accordance with the rule
making requirements of the Administrative Procedures Act and other
legal requirements of the federal government. (2, 4, 5)

Jurisdiction Criticisms

Office of Federal Housing Enterprise Oversight overstepped its
legal authority. (2)

Office of the Attorney General of New York overstepped its legal
authority. (2, 5)

Sources:

For full citations see Bibliography.

1 = Timothy T. Ward (April 30, 2008).
2 = John C. Dugan (May 27, 2008).
3 - Appraisal Institute, Fact Sheet (March 2008).
4 = Randall S. Kroszner et al. (June 19, 2008).
5 = American Bankers Association et al. (April 30, 2008).

Table 4 Sample of Specific Objections to the Home Value Protection
Program and Cooperation Agreement

* Opposes ban on appraisers working for lenders who report to
lender's risk management sector and not to loan production. (1, 2,
3, 4, 5, 7, 10, 11)

* Opposes increased use of appraisal management companies
encouraged by program and agreement. (1, 2, 3)

* Opposes incentives for substituting automated valuation models
and broker price opinions for appraisals. (1, 2, 9)

* Opposes banning mortgage brokers from ordering appraisals when
appraiser independence and program oversight is present. (1, 5, 6,
8)

* Program and agreement would cause massive disruption in loan
underwriting procedures. (1, 4, 5, 6, 7, 8, 11)

* Appraisal costs and appraisal management fees should be reported
separately to buyers on good faith estimates and closing
statements. (1)

* Program and agreement will raise mortgage origination costs and
consumer costs. (4, 5, 6, 7, 8, 9, 10, 11)

* Opposes program and agreement as setting up a redundant set of
national appraisal rules; some rules contradict existing law. (4,
5, 7, 9, 11)

Sources:

For full citations see Bibliography.

1 = Appraisal Institute et al. (April 30, 2008).
2 = North Carolina Appraisal Board (April 30, 2008).
3 = The Appraisal Foundation (April 29, 2008).
4 = American Bankers Association et al. (April 30, 2008).
5 = John C. Dugan (May 27, 2008).
6 = Federal Trade Commission (April 30, 2008).
7 = Office of the Comptroller of the Currency, Board of Governors
of the Federal Reserve System, Office of Thrift Supervision and
National Credit Union Administration (June 19, 2008).


Avery M. Abernethy, PhD, is a professor of marketing at Auburn University. He serves on several editorial review boards and has published many articles on marketing and public policy. At Auburn University he teaches real estate, sales, and marketing classes and has developed a course on real estate sales and marketing. He has been a real estate developer for many years. Contact: abernav@auburn.edu Harris Hollans, PhD, MAI, is an assistant professor of real estate in the Department of Finance at Auburn University. In conjunction with his academic career he has spent many years in fee appraisal, working in real estate markets across the southeastern and southwestern United States He has recently been involved in developing Appraisal Institute and university student internship and recruitment initiatives, and he is actively involved in leadership of the Atlanta Area Chapter of the Appraisal Institute. Contact: hollalh@auburn.edu
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