The Home Valuation Code of Conduct — a new set of rules governing appraisals conducted on loans slated for purchase by Fannie Mae and Freddie Mac that took effect on May 1 — has been a contentious issue for real estate professionals.
Some industry groups say the new rules, intended to protect appraisers from coercion by lenders, have derailed sales in part because lenders are shifting work to appraisal management companies that may employ appraisers with little experience in the markets they are assigned to work in.
Too often, critics say, appraisers are relying on distressed properties — homes threatened by foreclosure or repossessed by lenders — as "comparable sales" to value non-distressed or newly-built homes, without making appropriate adjustments to reflect differences such as a property’s condition or geographic location. Property values can vary greatly from neighborhood to neighborhood, critics say, and inexperienced appraisers are often unaware of such boundaries, critics say.
Many appraisers and appraisal management companies say market forces, not faulty valuations, are more likely to be the cause when appraisals come in at less than an agreed upon sales price. With many markets continuing to experience double-digit price declines, appraisers can’t turn a blind eye on recent sales that reflect those trends, they say.
The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, has also defended the Home Valuation Code of Conduct, saying it has not led to lower appraisals or encouraged the use of appraisal management companies.
A trade group representing appraisers, the Appraisal Institute, maintains the code has not only shifted work to appraisal management companies when mortgages are slated for purchase by Fannie or Freddie, but has had a similar impact on loans guaranteed by the Federal Housing Administration (FHA).
The National Association of Realtors has called for an 18-month suspension of the rules, and a bill has been introduced in Congress to accomplish that goal. The bill, HR 3044, had 46 cosponsors as of July 28.
In the meantime, Inman News has compiled a list of resources to help readers better understand and cope with the new rules.
Home Valuation Code of Conduct
Freddie Mac’s home page for the Home Valuation Code of Conduct includes links to the code itself, a fact sheet, a bulletin to lenders, and a "frequently asked questions" reference page.
Federal Housing Finance Agency
In a July 22, 2009 notice, "Update on Enterprise Implementation of the Home Valuation Code of Conduct," FHFA addressed "misinformation" about the code, which the agency said "is serving the intended purpose."
Freddie Mac bulletin to lenders …CONTINUED
In a July 10 bulletin, Freddie Mac reminded lenders that appraisers "must be familiar with the local market" where they are valuing properties, choose "appropriate comparable sales," and certify them as the homes "most similar" to the property being appraised. The bulletin also said appraisers must consider using distressed properties — including short sales, foreclosures or real estate-owned properties — as comparable sales if they are "representative of the properties available to typical purchasers for the market in which the property is located"
Fannie Mae FAQ
Fannie Mae recently updated its own 10-page "Home Valuation Code of Conduct Frequently Asked Questions" (FAQ). The code "does not speak to foreclosure data," Fannie Mae said. "It is up to the appraiser to determine if the data is applicable and appropriate or not."
Appraisal Institute
The Appraisal Institute and three other trade groups representing appraisers wrote Secretary of Housing Shaun Donovan on July 1 claiming the HVCC has caused "a significant transfer" of appraisals ordered by mortgage brokers to appraisal management companies. While the code does not directly impose rules on FHA appraisal-ordering practices, many lenders are now applying the same standard to their entire appraisal-ordering practices, the groups said.
Another policy adopted more than a decade ago limits how much appraisal management companies can charge on FHA assignments, the groups said, and that means many experienced appraisers are turning down FHA assignments from appraisal management firms.
Recent Inman.com articles on the Home Valuation Code of Conduct:
Appraisal rules backfire in down market
Appraisal management companies blamed for undervaluation
July 27, 2009 — Inman News columnist Jack Guttentag discusses unintended consequences of the Home Valuation Code of Conduct, arguing that "It should be scrapped."
Home sales show third month of gains
Appraisal issues still rankle NAR
July 23, 2009 — The National Association of Realtors, in reporting that home sales were up for a third consecutive month in June, renews calls for a suspension of the code. A survey of the group’s members found 37 percent claimed to have lost at least one sale because of the new rules, and 70 percent said consumers were paying higher fees, NAR said. …CONTINUED
Freddie Mac issues appraisal bulletin
Appraisers must have local expertise, choose ‘appropriate’ comps
July 14, 2009 — Industry groups welcome a July 10 bulletin from Freddie Mac, with the National Association of Home Builders calling calling the directions to lenders "a step in the right direction."
Appraisers shunning FHA work
Rules for Fannie, Freddie loans have wider impact
July 10, 2009 — Industry groups representing appraisers warn that the HVCC is also having an impact on valuations conducted for FHA loans. One group, the Appraisal Institute, says it supports provisions of the Home Valuation Code of Conduct that are intended to help appraisers maintain their independence and protect them from coercion.
Bill would suspend new appraisal rules
NAR seeks 18-month reprieve on valuation code
June 29, 2009 — Legislation that would grant a call by NAR to suspend the HVCC for 18 months is introduced in the House of Representatives.
Appraisal issue coming to a head
NAR calls for suspension of rules governing Fannie, Freddie loans
June 26, 2009 — NAR, NAHB and the Mortgage Bankers Association detail problems in implementation of the Home Valuation Code of Conduct. Testifying before lawmakers at a hearing on fraud prevention, Mortgage Bankers Association Chairman David Kittle, warns that affiliated with management companies have been "inundated with work" at the expense of independent appraisers.
The code doesn’t bar lenders from contracting directly with independent appraisers, Kittle says, but many lenders choose appraisal management companies to avoid the risk that they’ll run into compliance issues. Nationwide appraisal management companies "may not be as aware of valuation trends particular to a neighborhood as a local appraiser," Kittle testifies.
When stimulus is meaningless
Letters From the Home Front
June 24, 2009 — San Diego-based real estate broker-owner and Inman News columnist Kris Berg details some of the problems and unintended consequences of laws and regulations implemented to restore stability to housing markets.
The HVCC, she says, is "mostly serving to derail a lot of our traditional sales as underpaid and overworked appraisers apply the new ‘Random Valuation Method’ to homes in neighborhoods they have never heard of before." The careers of "a few established, veteran appraisers have been sacrificed in the process."
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