Federal regulators have instructed Fannie Mae and Freddie Mac to implement a process for receiving complaints about suspected violations of the Home Valuation Code of Conduct — more than a year after the controversial rules for appraisals were implemented.
The government will not require that Fannie and Freddie fund an independent institute to investigate complaints about attempts by lenders to pressure appraisers or otherwise violate the appraisal rules, as Fannie and Freddie had promised to do in March 2008 agreements with New York Attorney General Andrew Cuomo.
Instead of funding an Independent Valuation Protection Institute, Fannie and Freddie will provide a "targeted complaint process" using standardized complaint forms that can be submitted over the Internet. The complaint process is expected to be in place within the next few weeks.
Cuomo was informed of the change in policy by Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), which placed the mortgage guarantors in conservatorship in September 2008.
The Home Valuation Code of Conduct will no longer be in effect after Nov. 1, DeMarco noted, and Fannie and Freddie entered into the agreement with Cuomo before they were placed in conservatorships.
"In light of the billions of dollars in taxpayer funds (Fannie and Freddie) have drawn since entering conservatorships, I cannot, as conservator, justify … funding the institute," DeMarco said in a letter to Cuomo.
In their March 2008 agreements with Cuomo, Fannie and Freddie had agreed to provide $24 million in funding over a five-year period for independent monitoring of the new standards. Fannie and Freddie’s regulator at the time — the Office of Federal Housing Enterprise Oversight (OFHEO) — also signed the agreements.
In addition to fielding e-mail and phone complaints and investigating suspected violations of the code, the institute was supposed to make the results of its complaint reviews available to OFHEO and the New York Attorney General.
In his letter to Cuomo, DeMarco said the code has "improved the independence of appraisers, reducing opportunities for fraud, protecting consumers in the mortgage process and providing greater confidence to the investor community" who purchase of mortgage-backed securities.
Cuomo’s office did not respond to a request for comment. But the Appraisal Institute, a group representing more than 25,000 appraisers, said in a statement that it is "disappointed that a fully funded Independent Valuation Protection Institute won’t exist, and we hope Fannie Mae and Freddie Mac will do more than simply make referrals to applicable agencies."
The Appraisal Institute hopes Fannie and Freddie "will take aggressive action against loan sellers that violate the code and fail to obtain credible appraisals by competent appraisers."
The group said the code "can and should be improved and strengthened" and supports the passage of federal legislation to address the code’s unintended consequences.
With the Home Valuation Code of Conduct set to expire in 2010, the Appraisal Institute supports appraisal independence provisions in H.R. 4173, the Wall Street Reform and Consumer Protection Act, as passed by the House on Dec. 11 and referred to the Senate Banking Committee. S 3217, Sen. Chris Dodd’s financial regulatory reform bill, does not yet include those appraisal independence provisions.
Realtors and other real estate professionals have complained loudly about the Home Valuation Code of Conduct even before the new appraisal rules were implemented on May 1, 2009.
The code — an outgrowth of the New York attorney general’s investigation of the mortgage securitization process — was intended to protect appraisers from coercion by lenders.
As part of his investigation, Cuomo sued First American Corp. and its subsidiary eAppraiseIT, alleging that the appraisal management firm bowed to pressure from Washington Mutual to funnel work to appraisers who produced inflated valuations (Washington Mutual was not named in the lawsuit, which is still pending, and all the companies involved have denied the allegations).
In November 2007, Cuomo subpoenaed Fannie and Freddie, seeking details about loans the companies purchased from banks, and information about appraisal practices.
Four months later, Fannie and Freddie agreed to adopt the Home Valuation Code of Conduct. The code was originally to have gone into effect on Jan. 1, 2009, but implementation was pushed back in an attempt to address industry concerns over its impacts.
Although supporters say the code has been effective in protecting appraisers from coercion by lenders, critics say it’s also caused lenders to rely more heavily on appraisal management companies, or AMCs, rather than assigning work to independent appraisers.
Critics of AMCs say they often don’t pay enough to attract experienced appraisers, don’t give appraisers enough time to produce thorough reports, and employ appraisers who have little experience in the neighborhoods they are assigned to work in.
When the appraisals AMCs provide don’t support an agreed-upon sales price, banks won’t fund the loan, the sale is derailed, and the Home Valuation Code of Conduct is often blamed.
The Federal Housing Administration adopted new appraisal guidelines on Feb. 15 in order to be in "full alignment" with the Home Valuation Code of Conduct.
But FHA’s appraisal guidelines also include "geographic competency" requirements, and a cap on appraisal fees dating to 1997 has been eliminated. FHA now allows separate fees to be paid to appraisers and appraisal management companies, and for those fees to be determined by the market.
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