Know the Basics of the Home Valuation Code of Conduct (HVCC)

The sweeping changes to our appraisal industry has affected many home buyers, sellers, realtors, lenders, yet, many do not know the basics of the Home Valuation Code of Conduct or HVCC.  Before entering into your next home purchase or sale, know the HVCC basics.

How Did the HVCC Come to Be?
The Home Valuation Code of Conduct (HVCC) resulted from a 2007 lawsuit commenced by New York State Attorney General Andrew Cuomo against Washington Mutual's preferred appraisal management company (AMC) called "eAppraiselt LLC."  The lawsuit was brought after eAppraiselt was allegedly forced into providing WaMu with inflated values for properties in which WaMu was making loans.  eAppraiselt also allegedly benefitted from the influx of WaMu business because they were so willing to be coerced into appraising homes at higher property values.  Cuomo also investigated the appraisal practices and guidelines of Fannie Mae and Freddie Mac.

In 2008, in return for an agreement to end any further investigations, Fannie Mae, Freddie Mac, the Office of Federal Housing Enterprise Oversight or OFHEO (now the Federal Housing Finance Agency) agreed to change the appraisal practices and comply with new rules, called the Home Valuation Code of Conduct or HVCC.

Is the HVCC Federal Law?
No, the HVCC is legislation that was adopted by the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and the OFHEO specifically to end further investigation.  The legislation was signed in 2008, had an extremely quiet  "public comment" period that lasted from December through April 2009, in which 37,000 individual signed petitions against the implementation of the HVCC, and was approved and implemented on May 1, 2009.

What is the Goal of the HVCC?
On the face of it, the intent of the HVCC is laudable:  1) To provide accurate, independent appraisals for all home purchases; 2) To prevent those with an "interest" in the outcome of a loan from having any contact with or influence over the appraiser; and 3) To provide an oversight group to handle complaints and monitor appraisals in the form of the Independent Valuation Protection Institute or IVPI.

What Real Estate Transactions are Affected by the HVCC?
Any sale in which the buyer will be obtaining a loan that will be purchased or guaranteed by Fannie Mae or Freddie Mac. In other words, "conforming loans"--both high and low balance--will require appraisals that are in conformance with the HVCC, and according to NAR (the National Association of Realtors) as much as 71 percent of all loans are conforming loans.  The HVCC, however, does not apply to:

1) Jumbo Loans
2) FHA Loans
3) Private Money Loans

Although some lenders may request an HVCC compliant appraisal for the above, the request is voluntary and not required under the terms of the HVCC.

How Were Appraisals Done Before?
Prior to May 1, 2009, an appraisal report could be ordered by anyone--the lender, the Realtor, even the buyer.  Most often, however, the lender ordered the appraisal or relied upon the mortgage broker to find and recommend an appraiser for the job.  In some cases, the lender owned or regularly used an Appraisal Management Company or AMC--a vendor who hires appraisers for jobs--and these AMCs had closing working relationships with the banks they served.

Under this method of assigning appraisals, appraisers were encouraged to learn local knowledge of a particular geographic area or "micro-community," and the most knowledgeable appraisers were rewarded with the majority of appraisal assignments in that area.  In return, to cultivate and maintain a working relationship with mortgage brokers and lenders, the appraiser would complete appraisals quickly (within days) and often at a discount to repeat clients.

How Has the Appraisal Process Changed Under the HVCC?
Under the provisions of the Home Valuation Code of Conduct, beginning May 1, 2009, no one who will benefit from the funding of a loan may be involved in the selection, decisions or communications with the appraiser.  Specifically, the buyer, the real estate agent, the broker, and the lender are barred from choosing, supervising or communicating with the appraiser.  The only group that may contact the appraiser or assign an appraiser to a job will be the AMC or Appraisal Management Company.

When an appraisal is required, the lender contacts the AMC, who then assigns the appraisal to a state qualified appraiser on a first come/first served rotation that disregards the experience or background of the appraiser.  When the appraisal report is received, the report is given directly to the lender.  A copy of the appraisal may be sent to the buyer anytime prior to three days before funding the loan.

Who Are These AMCs?
The Appraisal Management Company may be a private company that serves lenders or bankers in a specific area, or may be a company that is partially owned by the lender.  The provisions of the HVCC allow a bank or financial institution to own up to 20 percent of an AMC, but disallows the bank owner from participating in the daily operations of the AMC.  There are supposedly seven major AMCs providing the bulk of the appraisal assignments to appraisers at present.  The AMCs are not certified, credentialed or accredited to assign appraisal assignments or receive reports, and there are no provisions of the HVCC requiring an AMC to be so qualified now or in the future.

What is the IVPI and How Was It Supposed to Work?
One of the landmarks of the HVCC, was the formation of an Independent Valuation Protection Institute or IVPI that provides an additional layer of "oversight" in appraisals.  The IVPI will be both a repository for all appraisals completed in compliance with the HVCC and would provide staff to investigate claims or complaints of improper appraisals.  The IVPI was to be overseen by a Board of Directors, who would remain independent of lenders and appraisers.  Unfortunately, at present, the IVPI does not currently exist, and there is no authority whom consumers can contact in the event of a poorly completed appraisal.

Where Can I Get More Information About the HVCC?
Fannie Mae has written an excellent guide containing the Frequently Asked Questions (FAQs) about the HVCC.  Their guide can be viewed at www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/hvccfaqs.pdf .  Fredde Mac has also produced an FAQ guide for the HVCC that may be viewed at www.freddiemac.com/singlefamily/hvcc_faq.html

Next time...the pros and cons of the HVCC and what this means to your next home purchase or sale.


References:  Fannie Mae and Freddie Mac HVCC FAQs, America Foy, SF Examiner "HVCC Legislation:  The road to real estate industry rebound is paved wth good intentions", Leslie Davis Atlanta Mortgage Examiner "Mortgage Nightmare/HVCC Appraisal Regulation"