Tolling the death knell for the Home Valuation Code of Conduct (HVCC), the Federal Reserve Board recently announced final regulatory orders for real estate appraisers.
The interim final rule for appraisers, part of the massive federal regulatory overhaul known as "Wall Street Reform" (officially, the Dodd-Frank Wall Street Reform and Consumer Protection Act), is designed to keep appraisers independent, free from third party pressure, honest and compensated fairly.
The Fed's interim final rule:
• Prohibits coercion and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment.
• Prohibits appraisers and appraisal management companies hired by lenders from having financial or other interests in the properties or the credit transactions.
• Prohibits creditors from extending credit based on appraisals if they know beforehand of violations involving appraiser coercion or conflicts of interest, unless the creditors determine that the values of the properties are not materially misstated.
• Requires that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities.
• Requires the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or of the appraisal management companies hired by the creditors.
Appraisers have been heavily pressured years -- before, during and after the boom -- to do the home valuation bidding of mortgage lenders, real estate agents, even buyers, sellers and refinancing homeowners who needed home values based on risky assumptions rather than true worth factors.
Bowing to pressure to over-value homes was one of the factors contributing the housing market crash that spawned the greatest recession since the Great Depression.
Amid howls from appraisers and other real estate industry quarters, the Federal Housing Finance Agency (FHFA) implemented HVCC in May 2009, after the housing bust, purportedly to improve the independence of appraisers by prohibiting lenders and third parties from influencing appraisers' work.
Unfortunately, the code of conduct cut deeply into appraisers' income and, as the housing market floundered, it worsened working conditions for honest, hard working appraisers, who have since been looking forward to new regulations.
Appraisers deemed the HVCC as a bogus effort to clean up the industry, because it didn't focus enough on appraiser competency; it undercut professional relationships between honest appraisers and reputable mortgage professionals; it increased the influence of bottom-line oriented appraisal management companies; and it encouraged the use of glossed-over appraisals that didn't reflect the true value of a property.
By and large, for those and other reasons, real estate agents, new home builders, even mortgage brokers and others likewise detested HVCC.
In advance of the new interim rules, Fannie Mae, working FHFA and Freddie Mac released its own Appraiser Independence Requirements -- new rules for mortgage companies selling loans to the government-sponsored enterprises -- which also overwrite HVCC rules.
Fannie's rules are in line with the new federal regulations, but all conventional, single-family mortgage loans must still be in compliance with HVCC until the release of the final Federal Reserve rules, effective April 1, 2011.
A public comment period on the new rules ends in December, but the interim rules will likely take hold with few changes.