Posted at the request of Gene Wunderlich:
Due to a legal settlement between Fannie Mae and Freddie Mac (know as GSE'S) and the New York AG's office the follow sweeping changes regarding appraisals will be coming down the pike fast (see below)
It looks like the settlement will be adopted nationwide sometime in the coming months. Loans will not be deemed agency salable without adoption of the changes
Changes include the possibility of
- An elimination of appraisals ordered or chosen by mortgage brokers. The wholesale lender would be fully responsible for the appraisal. The broker will be 100% out of the appraisal process.
- An elimination of in house appraisers for lenders.
- An elimination of loan officers selecting appraisers or communicating with appraisers (actually how the business was run 20 years ago)
The GSE'S have also agreed to a 24 million dollar settlement to start an appraiser data base. It seems the direction is to take the appraisers and the appraisals away from all corrosion of value by making them a fully separate entity.
See below for the briefing issued by the MBA.
The people in high levels we are talking to say this will be implemented in months and not days or weeks.
Fannie Mae and Freddie Mac reached a settlement today with NY Attorney General Andrew Cuomo and OFHEO establishing new appraisal requirements for mortgages the GSEs purchase. The settlement was a result of Cuomo's investigation into fraud in the mortgage appraisal industry.
Under the agreement, Fannie Mae and Freddie Mac agreed to adopt a "Home Valuation Protection Code." The code establishes requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence. The GSEs will adopt the code immediately, and issue an update to their seller guides to reflect the code. Beginning January 1, 2009, the GSEs will require that lenders represent and warrant that appraisals prepared in connection with mortgages.
The code includes a prohibition against broker-ordered appraisals and appraiser coercion. Lenders are prohibited from using an appraiser employed by:
1. the lender;
2. an affiliate of the lender;
3. an entity that is owned, in whole or in part, by the lender;
4. an entity that owns, in whole or in part, the lender
5. a real estate "settlement services" provider; or
6. an entity that is owned, in whole or in part, by a "settlement services" provider.
Some exceptions apply to the in-house appraiser prohibition. For example, lenders may use in-house staff appraisers to develop or use internal automated valuation models, or prepare appraisals for transactions other than mortgage origination transactions (e.g. loan workouts).
Other significant elements of the code include:
Prohibited Communications: The code prohibits anyone on the lender's loan production staff from selecting or communicating with an appraiser. The prohibition also applies to anyone who reports to any officer of the lender other than Chief Compliance Officer, General Counsel, or any officer who is not independent of the loan production staff.
Appraisal Hotline & Email: Lenders must establish a telephone hotline and an email address to receive complaints from appraisers, individuals, or any other entities concerning improper influencing of appraisers or the appraisal process. The hotline and email address must be staffed by someone in the office of the lender's General Counsel, Chief Compliance Officer or other independent officer.
Required Notices: Lenders must provide a separate notice of the hotline and email to appraisers they use AND to borrowers, as part of a cover letter accompanying the provided appraisal.
Duty to Investigate: A lender must begin a preliminary investigation within 72 hours of receiving an appraisal-related complaint. Upon completion of the investigation, the lender shall notify the Independent Valuation Protection Institute (see below) and any relevant regulatory bodies of any indication of improper conduct.
Duty to Test Quality: Lenders must establish appraisal quality control procedures and report the results of the quality control testing to the Independent Valuation Protection Institute and any relevant regulatory bodies.
Duty to Report Violations: A lender who has a reasonable basis to believe an appraiser is violating a law, or is engaging in unethical conduct has an affirmative duty to report the appraiser to the Independent Valuation Protection Institute and to any applicable state agency.
Independent Valuation Protection Institute: The GSEs also agreed to provide $12 million apiece over a 5-year period to fund an "Independent Valuation Protection Institute." A separate and independent organization, the institute would provide an appraisal complaint process, mediation of appraisal disputes, and mortgage fraud reporting.
The agreement terminates 28 months from the date of execution (i.e. July 2010). MBA staff are actively engaged in this issue and will provide comments regarding the code to the relevant regulatory agencies when the comment period opens.