With little fanfare, the Federal Housing Finance Agency last week issued an "update" on the Home Valuation Code of Conduct that governs Fannie Mae and Freddie Mac home appraisals that it said was intended to clear up "misinformation ... about the content of the Code."
In a July 22 statement, FHFA sought to clarify some of the HVCC rules but also made it clear that it believed the the Code is working as intended. In the statement, FHFA said, "Some have tried to cite the Code as the source of unrelated market dislocations."
Many real estate related groups have criticized the new code for allegedly encouraging the use of out-of-area appraisers who have little or no local market knowledge factor foreclosures and short-sales, often in distressed neighborhoods, into the valuation of traditional product in desirable communities. Among the groups that have raised issues concerning the HVCC are the National Association of Home Builders and the National Association of Realtors, which is currently lobbying Congress and FHFA to immediately implement an 18-month moratorium on the new HVCC rules, which took effect May 1.
In its update, FHFA, addressing several of the issues raised by real estate groups, said:
* "Communications with appraisers--Contrary to some suggestions, the Code provides for communications with appraisers about errors, additional needed information and unprofessional conduct. Quality control personnel may communicate with appraisers and other lender personnel, outside of the loan origination function. The real bar is on communications that seek to influence the appraiser to adopt a set valuation, which is prohibited.
* "Low appraisals--Contrary to some suggestions, the Code does not lead to lower appraisals for property. The Code insulates appraisers from pressures that led to higher or lower appraisals and should now lead to more accurate valuations. This is in everyone¹s interest. Declining home prices began long before the deployment of the Code and relate to many other factors. Current efforts at mortgage market stabilization are a central focus at FHFA and the Enterprises, but that needs to be achieved by keeping borrowers in their homes, not urging appraisers to improperly overvalue homes.
* "Appraisal management company (AMC) role--Contrary to some suggestion, the Code does not favor the use of AMCs over independent or in-house appraisers.Significantly, for the first time, the Code places the same requirements for appraiser independence on AMCs as the limits placed on lenders. Lender use of AMCs was increasing prior to the Code and one of the key goals and results of the Code was to strengthen appraiser protections when engaged by AMCs.
* "Unqualified or out-of-area appraisers--The Uniform Standards of Professional Appraisal Practice (USPAP) requires that an appraiser be competent and knowledgeable of the local market to perform an appraisal. In addition, in reinforcing USPAP, the Enterprise appraisal guides require appraisers to have knowledge of the local market. The use of unqualified in-state or out-of-state appraisers, unfamiliar with local conditions, should be reported to state appraiser licensing agencies.
* "Increased costs at closing--Closing costs have risen in some instances, but that has not been a function of the Code. Lenders have tightened underwriting standards, often requiring additional comparables by appraisers and even requiring second appraisals. Market investors have focused on reducing fraud and sought greater assurances about valuations. Appraisers have been working hard to meet these requests.
* "Turnaround times for appraisals--The Code may initially have slowed appraisal time as it was being implemented. However, there are other reasons for turnaround time changes; these include increased demands by lenders, the efficiency of a particular lender¹s underwriting process and the workload of appraisers. The Code¹s appraiser independence standards are critical for accurate valuations, a lesson learned in the current market crisis. Assuring a good appraisal is in the borrower¹s interest. As the market adjusts to new underwriting standards, including those for appraisals, more efficiency will reduce turnaround times.
* "Transferring an appraisal--Contrary to some suggestions, appraisals are transferrable between lenders under the Code. Transferring an appraisal may obviate the consumer¹s need to pay for a new appraisal should the first lender deny the loan. Whether a lender decides to transfer or accept an appraisal, however, is up to the lender, and is not related to the Code. Lender discretion in this area predated the Code."
The Realtors reacted to the FHFA statement with a one of their own Thursday, praising it for clarifying the requirements for local market knowledge and communications, which NAR said made clear that the new HVCC does not prohibit appraiser communication with real estate agents.
Still, the NAR said, "We will continue to push for [the moratorium] but are pleased that this first step was taken today."