Abraham Lincoln once said, "Be sure to put your feet in the right place before trying to stand firm." That belief more than ever applies to the real estate appraisal world, given the pending agreement between the New York Attorney General and the Government Sponsored Enterprises (GSEs) of Freddie Mac and Fannie Mae. Many trees have been felled creating the paper necessary for trade associations, governmental agencies, Congress, the general public, and countless others to provide comments and input into the final version of the Home Valuation Code of Conduct and related Independent Valuation Protection Institute
As an outgrowth of the savings and loan crisis in the late '80s, state and federal legislation (Financial Institutions Reform, Recovery, and Enforcement Act of 1989 [FIRREA]) was crafted to instill a better loan process, including appraisals. State licensing, the formation of strong appraisal review departments inside major lenders, and clearer lines of proper communication between parties involved in a loan transaction were specified. Unfortunately, most of these initial steps have proven to lack vigor.
Observing the substantive financial crisis currently underway, prior action hardly can be said to be doing the job. Many states already have enacted legislation prohibiting instruction to the appraiser of a desired value outcome, and Congress has several measures in committee that speak directly to appraisals.
The Proposed Code of Conduct
The code of conduct attempts to alter processes and implied conflicts of interest, and provide oversight in a way to correct prior shortcomings. Without a doubt, two fundamental objectives are reinforced heavily throughout the code. The signers recognized that it is essential in effective risk management to have accurate and unbiased valuations. To that end, appraiser independence is reinforced in several ways. Second, the proposed code speaks to appraisal information being important to consumers when they consider their best financial interests. A more transparent process bringing about greater consumer confidence in the lending system is clearly a desired outcome of the code. Obviously, the proposed changes are intended to merge properly with other active consumer protection measures, such as the Real Estate Settlement Procedures Act (RESPA). No doubt, further legislative actions can be expected, so things can get a bit complicated to say the least.
Appraisal independence is clearly the intention behind issues of who can order an appraisal-mortgage bankers, loan production staff, and commissioned personnel cannot, and lenders cannot use in-house staff except for appraisal review.
Further, no predetermined value expectation can be provided, nor can payment be withheld. And, as we would all expect, wording such as coercion, threats, collusion, inducement, intimidation, and bribery are prominent.
It becomes the lender's responsibility to provide the consumer a copy of all appraisals obtained on a property no less than three days prior to closing. The lender will not be allowed to own an affiliate, an entity owned by more than a 20 percent share, or a real estate settlement service provider that supplies real estate valuations for said lender. In fact, real estate settlement service providers will not be allowed to provide appraisals at all where traditional "bundled services" are combined title, appraisal, credit, and flood. The clarity of free-standing valuation work being provided is strongly underscored. Transparency and consumer confidence are emphasized.
Many other direct instructions are contained in the code that will assist in the effort of building consumer confidence. Lenders are instructed to create hotlines for complaints from appraisers, individuals, or entities that have concerns about improper influencing.
The Independent Valuation Protection Institute
Quality testing of 10 percent of all appraisals will be sent to the IVPI. And, most important, the lender will have to certify that its processes comply with the code in order for mortgages to be qualified for purchase by the GSEs.
The intention of the IVPI is to monitor the process surrounding "truly sound, accurate, independent, and reliable appraisals." They, too, will have a hotline dedicated to potential appraiser independence issues. The IVPI will mediate complaints with possible forwarding of the complaint to the relevant enforcement agency, whether state or federal. Experts in the fields of finance, law enforcement, compliance review, and other independent individuals are expected to be on the board of directors of the IVPI.
An Eye on the Future
It is a lot to digest, and I fully expect other significant market players to subscribe to at least the intent of the code. One reasonably can expect that FHA, Wall Street, and other loan securitization providers will fall into full stride with the code of conduct. In fact, many of these entities have begun to implement elements of the code believing such efforts will better ensure loan quality. Therefore, even if portions of the agreement are altered, my bet is the appraisal world is about to be changed significantly.
One can only speculate as to the specifics of those possible changes until the participants finalize the code. It is stressful for sure, but we should be reminded tl1at times of stress often create the best of futures. Fifteenth -century Italy was dominated by class warfare, slaughter, and trampling of human rights; however, it was followed by the great revitalization that gave us Leonardo, Michelangelo, and the Renaissance. I hope that the proposed Home Valuation Code of Conduct will lead to a similar outcome.