FHA Mortgage Guide

On March 3, 2008, Freddie Mac entered into a formal agreement with the New York Attorney General’s office in order to adopt a “Home Valuation Code of Conduct” (“HVCC”) that Freddie Mac will require all loan brokers and appraisers to comply with starting January 1, 2009. The agreement states (in part):

“To ensure appraisal independence and valuation protection, Freddie Mac has agreed to adopt a Home Valuation Protection Code . . . . which was crafted by the Attorney General’s Office and OFHEO, in consultation with the Enterprises and other market entities. The Code establishes requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence, among other things. . . . Freddie Mac will immediately announce the adoption of the requirements contained in the Code, make appropriate changes to its Guide and, beginning January 1, 2009, will require that lenders represent and warrant that appraisals conducted in connection with single-family mortgage loans, other than government-insured loans, originated on or after January 1, 2009 that are delivered to Freddie Mac conform to the Code. After January 1, 2009, Freddie Mac will not purchase single-family mortgage loans, other than government-insured loans, from mortgage originators that do not agree to adopt the Code with respect to such loans that are delivered to Freddie Mac.” [Emphasis added]

So what sort of actions or omissions must lenders and mortgage originators take in order to conform with the proposed new code?

The proposed code (HVCC), once enacted, would prohibit any lender (including any independent contractor or agent thereof) from “influencing the development, reporting, result, or review of an appraisal” through any manner. This very broadly drafted provision presumably means that mortgage brokers and loan officers are precluded from doing anything to influence the process or outcome of a real estate appraisal.

Under the HVCC, some of the specific acts which lenders and mortgage brokers are explicitly prohibited from engaging in are (in summary):

(1) withholding or threatening to withhold timely payment for an appraisal;

(2) withholding or threatening to withhold future business for an appraiser;

(3) promising future business or increased compensation to an appraiser;

(4) conditioning the ordering of or payment for an appraisal on the results of the appraisal;

(5) requesting the appraiser to provide premature estimated valuations prior to completion of the appraisal;

(6) providing an appraiser with an estimated or suggested valuation for a particular property;

(7) providing an appraiser stock or other financial or non-financial benefits; or

(8) any other act or practice that impairs an appraiser’s independence, objectivity, or impartiality.

To view the complete HVCC, visit: http://www.freddiemac.com/singlefamily/docs/030308_valuationcodeofconduct.pdf.

As you can imagine, lenders and mortgage brokers are less than thrilled about the proposed implementation of the aforementioned HVCC. One source quoted the National Association of Mortgage Brokers (NAMB) as stating the following about HVCC: “[The HVCC] will create a severe disadvantage to small business mortgage brokers, and prevent them from engaging competitively in the mortgage marketplace ….the National Association of Mortgage Brokers intends to consult with our legal advisors and to take appropriate legal action if necessary. NAMB’s president is also quoted as having said “This may be the most important issue facing our industry today.”

The question remains, is NAMB correct? Will the proposed HVCC, once enacted, create a severe disadvantage to small business mortgage brokers?

The answer of course is, “it depends.” Whether the enactment of the proposed HVCC will have a severe chilling effect on the mortgage brokerage and appraisal industries will depend on the extent to which the proposed HVCC is altered between now and the proposed enactment date. In this author’s opinion, the HVCC is far too broadly drafted to be enacted without further revision. And, it is unlikely that NAMB and its members will sit back while Fannie Mae enacts such a broadly prohibitive code. In fact, the agreement between Fannie Mae and the New York Attorney General contemplates political pressure for revisions of HVCC. The agreement states:

“The parties to this Agreement understand the significance of the reforms provided for herein and therefore will in good faith review the comments received during this period and will consider any amendments to the Code necessary to avoid any unforeseen consequences.”

Indeed, it is very likely that we will see NAMB and others place sufficient pressure on Fannie Mae to effect a second more narrowly tailored draft of the proposed HVCC. I would expect such a narrowly tailored revision of the HVCC to either (1) eliminate the current sweeping language that prohibits all manners of influencing appraisers or (2) inject more carve-outs that are expressly permissible behavior under the code (HVCC).

The NY Attorney General and Fannie Mae have made a commendable effort. Clearly some checks should be placed on the “objective” appraisal process we’ve become accustom to. However, the HVCC, as presently drafted (assuming it can be enforced), would likely result in such an overbroad preclusion of lender/originator acts that any relationship between originators and appraisers (however innocent they may be) would be severed, causing borrowers to find and hire their appraisers without any assistance.

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Attorney Tyler F. Belong is a partner at the San Diego law firm of Hogue & Belong. Mr. Belong is also a founder of the Mortgage Accountability Association.

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