WHAT YOU NEED TO KNOW ABOUT THE HVCC

What is the HVCC?

The HVCC is the “Home Valuation Code of Conduct”. It is a document written by the New York Attorney General (Andrew Cuomo) and OFHEO (among others) that establishes specific rules regarding the interaction of the lending industry with appraisers. It is attached to this document as “Appendix A”.  There is also a "FAQ's" section at the end as well.

How did it come about?

An Agreement was made between the NY AG and Fannie Mae, Freddie Mac, and OFHEO (Office of Federal Housing Enterprise Oversight) after an investigation by the AG’s office into mortgage fraud. More specifically, the AG he had issued subpoenas to Fannie and Freddie seeking information on the mortgage loans they had purchased from Washington Mutual. The AG had filed a lawsuit against First American and its subsidiary, eAppraiseIt on November 1, 2007 after numerous emails showing First American and eAppraiseIt had caved to pressure from WaMu to use appraisers who inflated appraisals on homes. Further, executives at First American and eAppraiseIt knew the behavior was illegal but intentionally broke the law in order to secure future business with WaMu. This Agreement was reached in order to terminate the investigation of Fannie and Freddie. (For the record, Fannie and Freddie note that their acceptance of the Agreement was in no way an admission of guilt or wrongdoing.)


What does it say?

Essentially the HVCC dictates that:

  1. Mortgage brokers will be prohibited from selecting appraisers.
  2. No one who is compensated upon the closure of a loan is allowed to communicate with the appraiser. This includes the entire loan production staff as well as the broker or LO.
  3. Lenders will be prohibited from using “in-house” staff appraisers to conduct initial appraisals unless they meet specific criteria.
  4. Lenders will be prohibited from using appraisal management companies (AMC’s) that they own or control unless they meet specific criteria.

All banks and lenders are required to adhere to the code effective 5/1/2009.  Fannie and Freddie will not purchase loans from any bank/lender that does not adhere to the code of conduct.

More specifically, as written in the “Home Value Protection Program and Cooperation Agreement” from Fannie Mae:

“After May 1, 2009, Fannie Mae will not purchase single-family mortgage loans, other than government-insured loans, from mortgage originators that do not agree to adopt the Code with respect to such loans that are delivered to Fannie Mae. Fannie Mae may exclude from the provisions of paragraph VI, subsections 1-4, of the Code, institutions that both meet the definition of a “small bank” set forth in the 12 U.S.C. § 2908, and which Fannie Mae determines would suffer hardship due to those provisions. Institutions excluded for hardship reasons must otherwise comply with the other provisions of the Code and must meet all appropriate standards of appraiser independence.”

(The statement from Freddie Mac is similar in content. See FAQ’s below for details on “small bank”.)

What does that mean to me as a Lender or Broker?

1.  All relationships with the hard-working appraisers you currently trust and rely on are null and void. While direct lenders or correspondent lenders (and AMC’s) are still allowed to order appraisals, no one may select an appraiser that is associated with the loan production staff.

  1. Essentially anyone who wants or expects to sell a loan to Fannie or Freddie is now required to use a 3rd party “appraisal broker” (an AMC) or set up sufficient interior controls such that no “influence” can be perpetrated upon the appraiser. As a broker you are completely distanced from the order process – only the lender may order an appraisal. As a lender, you must either set up interior controls to completely cut off all staff that may have an interest (financial or otherwise) in the transaction from the appraiser, or begin using an AMC (Appraisal Management Company).
  2. AMC’s traditionally assign orders to those appraisers willing to work for the least amount of money and that will turn the order around in the shortest amount of time, regardless of the complexity of the assignment. An appraiser who does work through an AMC typically gives up 40% or more of the appraisal fee. Using an AMC, despite their substantial marketing efforts to prove otherwise, will undoubtedly have the unintended consequence of providing an inferior product. Would you continue to do the same quality work that you do now for 40% less?

4. No more “comp checks” or “value checks”. You submit the loan, the lender orders the appraisal, and the appraisal is completed. Keep your fingers crossed!

5. The broker/lender is now fully responsible for payment to the appraiser for the appraisal report. The appraiser is no longer allowed to collect payment directly from the borrower. The lender may require the borrower to reimburse them, but ultimately the lender is responsible for payment.

What does it means to Appraisers?

1. If all of an appraisers clients were forced to stop using them and start ordering through an AMC (appraisal management company), this will likely mean that many experienced appraisers will leave the industry altogether. AMC’s typically take 40%-60% of the standard appraisal fee. This does not mean that the cost of the appraisal drops, as most AMC’s charge market rates or higher, so there is no benefit to the borrower.

2. Since the Agreement does not affect AVM’s (Automated Valuation Models) and BPO’s (Broker Price Opinions), the Agreement unfairly targets appraisers. This not only hurts appraisers, but consumers as well. Lenders may prefer these unregulated and unrestricted alternatives that are in contrast with the stated purpose of HVCC.

3. Disallows appraisers from engaging in ANY communication with mortgage brokers, loan officers, agents, or others that may receive a commission upon funding of a deal. This means that appraisers are not allowed to talk to their clients to ask general questions that impact the appraisal process, which will likely slow down the process. For example, if the appraiser needs an updated copy of the sales contract, he/she must contact the AMC in writing, wait for them to process the request, contact the lender, receive the updated contract, and send it back to the appraiser.

4. Finally, this Agreement renders meaningless all of the client relationships that they have built over the years. Not only is this an unprecedented act against a specific industry, but it completely removes the entrepreneurship from thousands of small business owners. There is no more need to sell your products and services or promote your business. Working through an AMC means you are just one of a rotating base of appraisers, and you have no option other than to wait for the phone to ring.

How will it affect Consumers?

1. Higher costs. If there is a need to change lenders and the original appraiser is not acceptable to the new lender, a new appraisal will be necessary. Additionally, an AMC may charge more than you typically pay now for an appraisal.

2. Increased time to fund loans as brokers lose control of choosing and managing appraisals and may necessitate longer rate locks or extensions of existing locks. In the case that a new lender or broker is chosen, a new appraisal may be necessary, increasing time to funding. The process of delivering contract updates, changes to sales prices or closing costs or other seller-paid incentives will have to be delivered to the lender, then to the AMC, then to the appraiser, resulting in longer turn times.

3. Decreased incentive to change lenders or brokers if they are not getting the service they deserve due to increased costs and time involved.