A Kinder, Gentler Appraisal Reform
After a story in the most recent issue of HousingWire Magazine questioned the fate of a bid to change the real estate appraisal process at Fannie Mae (FNM) and Freddie Mac (FRE), it appears that regulators and government officials have finally decided on a revised set of appraisal standards for the GSEs and a revised implementation date of May 1, 2009. A brief statement released after market close Tuesday evening by the Federal Housing Finance Authority said that the GSE regulator had finalized a revised Home Valuation Code of Conduct, after receiving comments from market participants. The HVCC was agreed to in March by the GSEs and the then-OFHEO (now FHFA), after negotiating with New York Attorney General Andrew Cuomo, who had threatened to sue both GSEs over alleged fraudulent appraisals. The code essentially requires that appraisers are selected and assigned on a blind basis via independent, third-party platforms, and was slated to go into effect January 1, 2009. The revised code comes just days before that time. Nobody at the FHFA, Fannie, Freddie or Cuomo's office was willing to comment on the record the HVCC when we sought to write our story for the November/December issue of HousingWire Magazine; one press department actually went so far as to refuse to return our phone calls on the matter. But one press representative suggested off the record at the time that there were more important issues at the GSEs than the HVCC in the wake of their government takeover. "You'd think that such a fundamental change, still formally slated to go into effect in less than two months, would be generating more noise surrounding a pending implementation," wrote HW's Kelly Curran in the story. "You'd be wrong." The FHFA did not specify in its statement Tuesday evening what sections of the HVCC had explicitly been modified, but a review by HW of the revised code suggests that the most fundamental change is one that orignally had appraisal groups universally concerned: lenders will still be able to use appraisals performed by affiliated appraisal management firms and in-house appraisers, but only under new circumstances the dictate when such arrangements are acceptable. The language in original code had essentially ruled this possibility out, an outcome that Jeff Schurman, executive director at the Title/Appraisal Vendor Management Association had said would have "devastating consequences" for the primary mortgage market. “The Enterprises have a strong interest in ensuring the soundness of the appraisal practices that lead to appraisal reports supporting the mortgage loans they purchase from lenders,” said FHFA director James Lockhart. “The code strikes a balance of assuring enhanced protections for appraisers while maintaining lender ability to address unprofessional appraisal practices and to perform quality controls on appraisals received." In other words, as some appraisers suggested, the revised code as it stands now probably won't change much about the day-to-day appraisal process -- it no longer looks to force lenders to use outside appraisal management firms, for example -- but it does put new standards in place regarding how the appraisal process is to be managed, both within lenders and at appraisal management firms alike. It's clear that Cuomo, for whatever reason, backed off on much of the earlier fire-and-brimstone sort of talk that he had rained down on the appraisal business earlier this year. "This revised agreement with Fannie Mae and Freddie Mac is a step forward: it preserves the core goals of ensuring appraiser independence and eliminating systemic conflicts of interest," he said Tuesday in a statement. "It also incorporates common-sense suggestions of industry participants that increase flexibility and efficiency." Write to Paul Jackson at email@example.com. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.