In November, 2007, the Attorney General of New York, Andrew Cuomo, announced his office would be investigating the nation's two largest financiers of home mortgages - Fannie Mae ("Fannie") and Freddie Mac ("Freddie") - for their roles in purchasing home loans without ensuring appraisals on the loans were accurate.
In response, Fannie, Freddie, the Federal Housing Finance Agency, and the Attorney General reached an agreement that would ensure the two congressionally chartered mortgage companies purchase mortgages based on fair, accurate, and independent appraisals. The agreement called for Fannie and Freddie, which are government sponsored enterprises (collectively the "GSEs"), to only buy mortgages from sellers of loans which are compliant with the Home Valuation Code of Conduct ("HVCC"). Thus, sellers and servicers of single-family mortgages, with loan applications dated on or after May 1, 2009, who wish to continue selling loans to the GSEs, must represent and warrant that the appraisal reports are obtained in a manner consistent with the HVCC.
Why Does This Matter?
Currently, approximately 85 percent of U.S. mortgages are purchased by the GSEs. Under the HVCC, the GSEs will have the right to force a seller to buy back any loans determined to be non-compliant with the HVCC. However, there are concerns that not all lenders are "fully aware that their systems and processes will require significant changes to avoid penalties associated with selling their new originations to the GSEs after May 1," according to Paul Jackson, Survey: Lenders Not Yet Ready for HVCC, Housingwire.com, April 6, 2009.
A recent survey indicated that, although a majority of U.S. mortgage lenders were "confident" their systems would be ready to comply with the new requirements of the HVCC, only 14 percent had completed the necessary upgrades. Because dealing with the GSEs is so integral to the U.S. mortgage industry, and failing to comply with the new rules creates a possible bar to any dealings with the GSEs, mortgage lenders must be sure that they are fully compliant by May 1.
For What Does The HVCC Provide?
Commencing May 1, all mortgages sold to the GSEs must be compliant with the HVCC. Therefore, all lenders hoping to continue their relationship with the GSEs must abide by the following terms:
- Lenders and third parties are prohibited from influencing, or attempting to influence, the development, result, or review of an appraisal report.
- Lenders are required to ensure borrowers are provided a copy of the appraisal report no less than three business days prior to the closing, unless waived by the borrower.
- Lenders, or third parties authorized by lenders, are the only parties responsible for selecting, retaining, and providing for payment of all compensation to appraisers.
- Appraisal reports prepared by an appraiser for a different lender may be used as long as the other lender provides written assurances that it is compliant with the HVCC and such appraisal conforms to the HVCC and is otherwise acceptable.
- There is absolute independence within the lender organization's appraisal function and loan production. The lender's loan production staff is prohibited from any involvement in the selection of the appraiser and from any subsequent substantive communications with the appraiser.
- Lenders may rely on an appraisal report prepared by an in-house appraiser or an affiliate in underwriting a loan only if certain conditions are met.
- Lenders may use in-house staff appraisers to: (1) order appraisals; (2) conduct appraisal reviews and other quality control functions; (3) develop, deploy, or use internal automated valuation models; and (4) prepare appraisals in connection with transactions other than mortgage origination transactions, such as workouts, if the lender complies with the terms of the HVCC.
- Lenders must have written policies and procedures implementing the HVCC and mechanisms to report and discipline any violators.
- Lenders' appraisal functions must be either annually audited by an external auditor or subject to federal or state regulatory examination. The lender must provide any audit findings indicating HVCC non-compliance.
- Lenders may use appraisal reports prepared by other entities engaged by the lender to provide other settlement services for the same transaction, so long as certain conditions are met.
- Lenders are required to conduct quality control tests by randomly selecting a 10 percent sample of appraisal reports or valuations used by the lender. All adverse findings that affect GSE loans must be reported to the GSEs.
- Sellers with an asset size of less than $250 million are classified as small banks, as defined in 12 U.S.C. Section 2908, and are exempt from the requirements in Section IV of the HVCC. For sellers classified as "small banks" to qualify for this exemption, they must represent and warrant that they have in place appropriate policies and procedures, as well as adequate controls to prevent undue appraiser influence.