In case you’ve been living under a rock somewhere I wanted to share with you a summary of the March 3 agreements signed by OFHEO, NY Attorney General, Fannie Mae and Freddie Mac to promote appraisal independence. There is a lot of misinformation buzzing about. So first let’s start by reading the actual agreements. And also it is helpful to listen to NY AG Andrew Cuomo’s comments during the press release. Listen to Press Release Audio

Within the press release…” the parties also agreed to establish and the Enterprises fund an Independent Valuation Protection Institute (IVPI) designed to supplement current efforts to provide an appraisal complaint  process, mediation of appraisal disputes and mortgage fraud reporting. The agreement seeks the comments of market participants that will be considered in making amendments to the Code during the implementation process”.

There is indeed a comment period. To respond directly to Fannie Mae and Freddie Mac go directly to their websites.

One comment of note by Jim Lockhart, Director of OFHEO, is that OFHEO is committed to working with appraisers and others to build upon best practices, recognize constructive comments and avoid unintended consequences. They are paying attention. Unintended consequences can muck up any well intentioned deal.

I can’t stress enough that you need to read the documents. There are a lot of urban myths being perpetuated in the blogosphere. Be careful to separate fact from fiction. And please note what follows is indeed my summary. I am not a lawyer and I don’t play one on TV. Some areas are a little fuzzy. Let’s pray that common sense rules and we can look forward to clarification going forward thanks to your thoughtful comments to the NY AG’s office and to OFHEO.
The end game is appraisal independence.

Joan’s highlights:

• Fannie and Freddie agree to adopt the Home Valuation Protection Code, the “code”
• The “code” establishes requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence.
• Amendments to the code will be considered
• The Independent Valuation Protection Institute( IVPI) will be established to monitor and study the integrity of the valuation processes
• The IVPI will establish a complaint hotline for consumers
• The IVPI will have a Board of Directors. The IVPI will have full time staff. The NY AG and OFHEO must both approve membership to the board.
• Fannie and Freddie each agree to fund the IVPI for a total of $24 million for a period not less than 5 years. Others may be invited to contribute.
• The NY AG’s office agrees to terminate its investigations into Fannie and Freddie

The Home Valuation Code of Conduct

•  No one may influence an appraiser
• An appraiser may not be removed from an approved list without prior written notice
• No second appraisal or AVM may be used unless the first is tainted or flawed
• Borrower will be provided a copy of the appraisal no less than 3 days before closing
• The lender will not accept any appraisal completed by mortgage brokers or real estate agents
• The lender shall not utilize any appraisal prepared by an appraiser employed by the lender, an affiliate of the lender, an entity owned in whole or in part by the lender, real estate settlement services provider as defined in RESPA. Lenders may use staff for reviews and other non origination processes.
• Hotline will be established to take complaints regarding improper influence
• Lender agrees to QC 10% ( or other significant percentage)of all valuation products.

That’s a quick summary of my interpretion. The stated intent is appraisal independence. To quell rumors that all appraisals must ordered through a mono- line AMC is simply not a factual statement. Is it a possibility? Maybe. My only source of confusion is around the intent of Article VI.  As I read it no appraiser can do an appraisal. By definition a “settlement service” provider includes appraisal companies. So logically an employee of an appraisal company cannot do an appraisal for a Fannie/ Freddie transaction.

My summary is that according to these agreements there will be 3 ways for a lender to do business going forward:

1. Captive AMC with less than 20% ownership
2. Mono Line AMC
3. Internal lender dept whereby the lender manages a list of qualified independent contractors

Currently there are 4 ways for lenders to conduct business:

1. AMC including bundled services
2. Captive AMC
3. Internal dept
4. Staff appraisers

Please note this is my personal opinion. None of those 4 processes are inherently independent. The “code” suggestions are not inherently independent either. All of them can be independent with appropriate “firewalls” established. Oversight is a biggie. I could wax eternal on how we got to where we are.

If staff appraisal operations are eradicated where will mentorship opportunities from these lenders be found going forward? Lack of mentorship and appropriate training are already at a crisis level. It has been suggested that incompetence is the bigger problem yet independence has clouded our vision. When we actually start to QC and pay attention to the appraisal, we as a community won’t be able to deliver the goods. If appraisal independence is finally dealt with we may indeed find a whole new set of problems.

There is very little detail supplied in the agreements regarding the IVPI. And the devil might just be in the details. Appraisal land has a very disconnected, complicated, difficult to navigate, regulatory maize that needs to be simplified. It has been suggested by some lenders that Title XI needs to be opened up and recalibrated to accommodate these new agreements. We shall see.

Unintended consequences keep me up at night.

I may be a bit naive but I recall the day when chief appraisers were highly respected positions within lending institutions. They were well compensated and their integrity was valued. Sales and production has no place in the appraisal process. It is unfortunate that it took a global meltdown for us to finally take notice that collateral valuations are a critical part of the loan process.

I encourage you to make comments to Fannie and Freddie. You can do that all by yourself. It is not necessary to be a part of an association. As a free market supporter it is difficult for me to suggest that we regulate ourselves into oblivion. I am suggesting that we need to simplify the regulatory process and that we need oversight and enforcement.

Keep your eye on the prize, appraisal independence. It’s worth fighting for.

Be careful out there.

Joan Trice
Publisher, Appraisal Buzz