Sent to Fannie/Freddie/OFHEO on April 17, 2008
This letter is our response to the Home Valuation Code of Conduct. The Home Valuation Code of Conduct (HVCC, the Code) has created many concerns for the Real Estate Appraiser's Association. The Real Estate Appraiser's Association (REAA) requests that OFHEO, Fannie Mae and Freddie Mac do not implement this agreement unless it is significantly modified to ensure the intended result is to restore public faith in the process of obtaining unbiased and impartial valuations.
Section I of the Code correctly identifies some of the more egregious practices in the industry. These abuses have distorted the impartial nature of the valuation process and ultimately have undermined the quality of the valuations and have eroded public confidence.
There are several points of concern the REAA has with subsequent sections of the Code.
Section II should be amended to make provisions for a lender to provide a copy of any valuation product, not just an appraisal report, since confidence in the impartial nature of the valuation process should not be only applicable to appraisal reports. A uniform and responsible disclosure of the valuation product is a prerequisite for public confidence. The borrower must also be made aware in written form of the intended use and intended user of any valuation product.
Section III speaks to lender responsibility in selection, retention and payment of appraisers. While the intent is to channel the valuation requests away from potential influence; our view is that it leaves few options but for the use of unregulated appraisal management companies.
The lack of any regulatory oversight for appraisal management companies is a concern for the ordering process.
For lenders, the impartiality of the ordering process becomes suspect by later provisions noted in section VI (6) that allow a lender to have an ownership interest of up to 20% in the ordering entity.
We would rather have all entities that order appraisals be 100% accountable and be subject to the same stringent guidelines to maintain a more consistent application of impartiality to the valuation ordering process.
Section IV seeks to establish the need for "absolute independence" in the responsibilities of those that select, retain, recommend, communicate, order valuations from or manage appraisers. Being cognizant of the small size of some originators, we support the mandate that "The lender must show that prudent safeguards were in place to prevent the loan production side of the business from influencing value."
The REAA supports both concepts of absolute independence and prudent safeguard in Section IV but suggests that the mission of Section V, "appropriate training and qualification in the area of real estate and appraisals" include the study and demonstrated understanding of the Uniform Standards of Professional Appraisal Practice (USPAP) for all entities that order appraisals.
The fundamental flaw in the current system of appraisal ordering that invites many the abuses outlined in Section I, is that appraisers adhere to the Uniform Standards of Professional Appraisal Practice while clients are almost completely unaware of the standards that govern licensed and certified appraisers.
If undue influence is to be minimized, the regulating authority must ensure the appraisal request and the assignment are completed in conformance with USPAP by both parties.
Section VI - Remove the exceptions allowing a lender to own portions of an appraisal management company, regardless of percentage. Any percentage of direct ownership would reduce the concept of "absolute independence" of the valuations provided by a management company. The use of internal Automated Valuation Models (AVM) for the purposes of collateral valuation should come under the same "absolute independence guidelines" that apply to appraisers or remove the ability to use AVMs internally. Furthermore, remove the ability for a lender to own and operate, in whole or in part, an internal AVM used for valuation.
Section VII - Remove the provisions allowing the lender to serve as its own investigator, and shift the hotline ownership to the IVPI (Independent Valuation Protection Institute) which can independently choose to refer cases to law enforcement authorities or any other regulatory bodies. Modify the hotline notification language to apply to all parties to the transaction, and to all valuation products, instead of unfairly singling out only appraisals and appraisers for implications of potential impropriety.
Section VIII - Valid sample sizes and testing methodology are more properly determined by risk analysts. The responsibility of the lender to show that prudent safe guards were taken to show no undue influence in the ordering process should extend along the chain of processing to post funding analysis to show all safeguards in place perform as warranted.
Section IX - The reporting mandate should be extended to include the reporting of unethical or improper conduct of any party associated with the transaction that violates the guidelines of Section I.
Section X - Any type of valuation should carry the warrant that it was performed in accordance with the HVCC.
Section XI - The distinctions and higher standards associated with an actual appraisal prepared by a licensed or certified appraiser should be made clear. Exclusions given to alternative valuation methods provide a subtle hint to lenders that these valuation products are equal to USPAP compliant appraisal reports.
The Real Estate Appraiser's Association believes that the solutions outlined above, as well as additional education requirements for appraiser certification enacted by the Appraisers Qualifications Board (AQB) in January 2008, will promote increased competency of appraisers and improve independence in the appraisal process.
We respectfully ask that OFHEO, Fannie Mae, and Freddie Mac please give these terms consideration and modify the agreements so that all the concerned parties- appraisers, mortgage brokers, loan originators, lenders, banks and most importantly, the public, are protected in an equitable manner.
For all reasons mentioned above, The Real Estate Appraiser's Association calls on OFHEO, Attorney General Cuomo, Fannie Mae and Freddie Mac, to amend the HVCC agreement in order to address these fundamental concerns before the unintended consequences of this plan cause further damage to the mortgage industry and to the appraisers who serve the nation's lenders.
The Members of the Real Estate Appraiser's Association
Authored/edited by William K McKnight, Mark Lindsay, et al.