REQUIRED READING: The mortgage and appraisal industries have settled into and are working within the Home Valuation Code of Conduct (HVCC) that became effective April 1, 2009, following an agreement between Fannie Mae, Freddie Mac and the Office of the New York Attorney General. Since then, all mortgage brokers and appraisers have found themselves working with new requirements to provide for appraisal independence for Fannie and Freddie loans.
The market has faced several obstacles with the implementation of the HVCC: appraiser-panel management, paying appraisers, geographic competency issues, value issues, mortgage brokers with ‘no control’ of the appraisal process, etc. The market is working through these issues, and most of the issues are being solved.
Beginning Feb. 15, Federal Housing Administration (FHA) Appraisal Independence Policies very similar to the HVCC went into effect for all FHA-insured loans. The FHA policy and the HVCC have established standards for solicitation, selection, compensation, conflicts of interest and appraiser independence.
However, they also prohibit the loan production staff from selecting, retaining, recommending or influencing the selection of appraisers and prevent them from participating in any direct and substantive conversations with appraisers or appraisal management companies (AMCs) regarding the appraisal valuation.
The FHA, which is the largest insurer of mortgages in the country, provides mortgage insurance on loans made by the FHA-approved lenders throughout the U.S. As of Feb. 15, new FHA policy states that FHA-approved lenders are now prohibited from accepting appraisals prepared by FHA-approved appraisers who have been selected, retained or compensated in any manner by a mortgage broker or any member of a lender's staff whose commissioned compensation is directly tied to the successful completion of a mortgage loan insured by the FHA.
The appraisal is the lender's tool for making a determination of whether the property meets the FHA's minimum property requirements for an FHA-insured mortgage. The FHA appraisal process has traditionally asked more of the appraiser than is asked in the completion of an inspection for a conventional appraisal.
The 139-page valuation protocol identifies, line by line, what the expectations are regarding the inspection. One of the major differences between a regular inspection and an FHA inspection is that a property inspection will involve and in-depth visual inspection of all areas of the subject property, including the attic. It is always advisable for the lender to inform the homeowner of this requirement. The appraiser must inspect the attic, even if access is available only through a scuttle.
Another major difference from a conventional loan appraisal is that for an FHA appraisal, the appraiser must report any deficiencies noted during the inspection. Required FHA repairs (deficiencies) are those that impact the safety of the occupants, the security of the property or the soundness of the structure.
In cases where such items are identified, it is the appraiser's responsibility to make the value opinion of the property ‘subject to’ the repair of the item. Such appraisals that mandate a repair item will then require a compliance inspection to ensure the deficiency has been corrected.
While potential repairs do cause a delay to the transaction, they are essential in order to eliminate conditions that threaten the physical security of the property. FHA appraisals, however, are no guarantee that the property is free from defects; the appraisal only establishes the value of the property for mortgage insurance purposes. In fact, buyers are generally encouraged to engage a qualified home inspector to obtain a more detailed physical (rather than visual) property inspection.
ABCs of AMCs
AMCs and their mortgage industry partners have teamed quickly and efficiently leading up to and after April 1, 2009, making the HVCC transition as seamless as possible. The same has been true for the Feb. 15 FHA policy.
Lenders, brokers, AMCs, appraisers and many others in this evolving mortgage industry have invested millions of dollars in a short period of time to comply with the HVCC and the FHA policy, and this transition has not always been perfectly smooth.
By working with an AMC and FHA appraisers, the appraisal process will add value to the loan process and will provide important information regarding the collateral of a loan. AMCs are also included in the new FHA policies, and FHA-approved lenders must ensure the following:
- FHA appraisers are not prohibited by the lender, AMC or other third parties from recording the fee that the appraiser was paid for the performance of the appraisal in the appraisal report. FHA roster appraisers are compensated at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.
- The fee for the actual completion of an FHA appraisal may not include a fee for the management of the appraisal process or any activity other than the performance of the appraisal. Any management fees charged by an AMC or other third party must be for actual services related to ordering, processing or reviewing of appraisals performed for FHA financing. AMC and other third-party fees must not exceed what is customary and reasonable for such services provided in the market area of the property being appraised.
The goal of the new FHA policies is to clearly establish appraiser independence, which, in turn, should minimize the opportunity for collusion between the parties involved in the mortgage transaction and eliminate the pressure that could potentially be exerted on the appraiser to ‘hit value.’ It has been stated many times that these unfortunate occurrences have tangibly contributed to the current real estate crisis.
Why are these policy changes important? Directly speaking, although the majority of brokers and lending institutions are conscientious and conduct themselves honorably, too great a percentage are only interested in closing loans and generating commissions. Those with unscrupulous business practices continued to seek out those appraisers that they could influence to ‘push’ values with the promise of more work if the appraiser ‘worked with them’ on value. Many in the mortgage industry used their ongoing appraisal work as leverage with these appraisers to get the valuations they needed to close their loans.
Simply put, with the adoption of FHA's new policy of Appraiser Independence, mortgage brokers can no longer directly order the appraisal for any FHA transaction. Many lenders will continue to rely on AMCs to provide appraisals on a regional or nationwide level as they have with the HVCC.
The consequences of the HVCC and FHA policies are, in some instances, frustrating. Many independent appraisers have lost long-time local broker relationships and have had to work on a fee-split basis with national AMCs. In addition, mortgage brokers can no longer work with and have direct influence over appraisers. The broker has lost ‘control’ over the appraisal process.
however, even with the challenges, the new FHA and HVCC appraiser independence policies will help provide stability and eliminate fraud and collusion in a real estate market that was completely out of control.
George K. Demopulos is president, chief corporate appraiser and co-founder of Lincoln Appraisal & Settlement Services, based in Providence, R.I. He can be reached at (401) 831-3500.