By AppraiserLoft Team | June 4, 2009
Cuomo’s office: “GSE’s knew they were buying loans with appraisal fraud…”
By Teri Buhl
Teri Buhl is an investigative journalist covering Wall Street who has written for the New York Post Sunday Business, HousingWire and Trader Monthly. Contact her at teribuhl@yahoo.com.
Despite calls for reform, Countrywide is still showing signs of committing the same predatory lending sins under new owner Bank of America. As Congress rushes the lending reforms through the House this month, banks are still fighting to keep control of how they run the mortgage business, and keep collecting lucrative fees in every step of the lending process.
Exhibit A is a $2.8 billion class action lawsuit filed on March 7th against a BofA subsidiary called Countrywide-KB Home Loans and its wholly owned appraisal firm Landsafe, Inc. The suit accuses the two subsidiaries of an appraisal inflation scheme affecting over 14,000 borrowers, and is a product of a yearlong investigation examining home buyers in California, Arizona, and Nevada. Leading the charge were the Laborers’ International Union of America (LIUNA) and Seattle-based law firm Hagen Berman. The law firm is presently litigating over three class action cases against Countrywide.
“These cases are a reminder the mortgage business is completely broken, says Ira Rheingold, president of National Association of consumer Advocates in Washington. “It is obvious the big banks are still engaging in a number of practices that violate the Real Estate Settlement Procedures Act (RESPA). Laws that were designed to create consumer choice are being ignored.”
Congress passed RESPA in 1974 to prohibit certain practices such as referral fees between lenders, brokers, and appraisers that increase costs to homebuyers.
Jordan Ash, who led LIUNA’s investigation for the lawsuit states that his group went door to door in KB Home developments looking for someone to show up with proof that Landsafe had inflated appraisals – LIUNA’s goal is to curtail kickbacks and price inflation between builders and lenders. He found his guy in Nathaniel Johnson, a KB home buyer in Arizona.
In Johnson’s case, the company inflated his appraisal by around $45,000. He had obtained a similar price comparison from his credit union, but when he presented that to a Countrywide KB Home Loan officer, the officer said he could only use their appraiser (Landsafe) if he wanted the loan and the home. When defendants like Johnson tried later to sell their homes, they found that they were now underwater, and then realized how inflated the appraisals were.
It turns out that Countrywide had been ignoring warning signs since 2006. Back then, former Countrywide-KB Home Vice President Mark Zachary began warning banking executives that Landsafe’s appraisals were inflated by at least 6 percent or were using comparable home prices in other neighborhoods. Legal documents show Zachary was questioning top bank executives on why only one appraiser was being used.
In addition to homebuyers being duped, Zachary argued, investors funding these loans were also defrauded, as the actual home value could be less than the loan amount — putting the buyers upside down immediately after the purchasing, and the investors at a net loss.
In mid 2007, Countrywide fired Zachary after being asked to name executives involved in the scheme and is now battling with BofA’s legal team in Texas state courts over wrongful termination.
This isn’t the first time a large bank has been sued for being in cahoots with appraisal companies. New York Attorney General Andrew Cuomo is still fighting a lawsuit started in November 2007 with California-based First American and its appraisal firm eAppraiseIT. Charges include appraisal fraud and kickbacks on loans made with Washington Mutual. Last month Cuomo defeated a yearlong battle to have the case (currently in discovery) dismissed because First American said a federal regulator needs to charge it with wrong-doing. The N.Y. Supreme court thought otherwise, and Cuomo’s office says it still plans to pursue millions in monetary damages, along with not allowing the two to do business with each other.
When we asked Rheingold if he was surprised that Bank of America didn’t shed Landsafe when it bought Countrywide last June, he laughed. In the 1990s, BofA owned one of the nation’s first subprime lenders, Equicredit, but it later sold off following lending and foreclosure fraud lawsuits.
“Bank of America is no angel,” says Rheingold. “When I was running legal assistance in Chicago, if we got a foreclosure case with Equicredit involved, I took the case right away because I knew there would be illegal behavior by the lender. BofA always called to settle after I made the case public.”
Difficulty Changing the Culture
Outside industry experts on Bank of America’s advisory council, speaking on the condition of anonymity, said they had hoped Countrywide’s shady past would be cleaned up within a year of the new ownership. But nearly a year later, we’ve learned that the Charlotte-based BofA has simply assumed the same practices that branded Countrywide a financial predator.
According to sources, Barbara DeSoer — head of BofA’s combined mortgage unit — was personally confronted about LandSafe conflict of interest practices while at a council meeting in Dallas at the end of March by a member of the advisory council. In response, she said she didn’t see it as a conflict of interest.
Today, Internet forums are packed with chatter complaining about Landsafe. Last week on one such forum,the Implode-Explode Forum, people posted statements about the lack of employee morale currently at Landsafe, blaming management’s “churn-and-burn” appraisal ethics. One certified appraiser using the pseudonym “exlandsafeappraiser” says, “From an appraisal standpoint, Landsafe values quantity over quality… hit the number and move on.”
Another former Landsafe appraiser who left the firm last October said, “There was tremendous pressure to hit values, especially on the KB new homes. There was a lot of “can you find me another $5,000?”
Secret Blacklists and Whistleblower Traps
Sources who’ve worked for the firm and spoke on the condition of anonymity for fear of retribution told us about a secret database so-called “UVL” or “unapproved vendor list.” The list keeps track of all appraisers who’ve been blackballed for not meeting the lender’s price target. In fact, when employees log onto the list, a warning flashes on the screen and tells the user not to disclose the list’s existence.
A person who currently works at Landsafe says “At BofA’s Landsafe, when the in-house reviewer does his check-off on the appraisal, the first thing we’re told is to check the UVL list. If the appraiser is on it, out goes the appraisal in the trash.”
After repeated inquiries, a Bank of America spokesperson finally commented, “We do have a UVL list that is used for quality control based on professional appraisal standards and Fannie Mae guidelines. We strongly believe it doesn’t violate HVCC.”
Appraiser Blackball lists have recently been banned for the mortgage industry – that is, if they want to sell their loans to Freddie and Fannie. Section one, paragraph two of the Home Valuation Code of Conduct (HVCC), which took effect May 1st, clearly states that withholding or threatening to withhold future business for an appraiser, or terminating or threatening to terminate an appraiser is a full-blown violation of the new rules imposed on lenders and appraisal management companies (AMCs). But it’s likely going to take a brave Landsafe employee with a guilty conscience to report violations to the new Independent Valuation Protection Institute for any actual consequences to be levied against BofA’s profit stream.
In fact, in an attempt to ensure warnings are funneled first into the perpetrators nest, Landsafe’s response was to set up an independent hotline of their own with a toll free number and company email for outside appraisers to send complaints.
Cuomo’s “Chinese Wall”
While Congress and federal regulators have yet to write significant laws eliminating conflict of interest between appraiser and lenders, Cuomo has already up-ended the system — for better or worse.
Last March, Cuomo agreed to stop his investigation into Freddie Mac and Fannie Mae for knowingly accepting loans packed with fraudulent appraisals. Sources close to Cuomo’s office that were involved in the GSE investigation said his case was strong enough to prove the GSE’s knew they were buying loans with appraisal fraud and had no choice but to bend to the NY AG’s terms to get the case dropped. In return, the agencies agreed to not buy any residential loans from banks if they broke a new set of rules Cuomo created call the Home Valuation Code of Conduct (HVCC). The crux of these rules prohibited banks “owning” appraisers, and disentangled appraisers’ pay from the value of the home.
Howard Glaser, mortgage industry analyst who worked with Cuomo at HUD says, “In the optimal world, the appraisal function would be run by an independent company separate from all others involved in the lending process. The bank regulators should have been inspecting these relationships. Unfortunately, Bank of America/Landsafe still doesn’t have a federal regulator who has ever cared about problems in the appraisal process.” Their regulator, the Office of Comptroller of the Currency (OCC), is run by a Bush appointed holdover John Dugan.
While bank lobby groups tried to sue Cuomo’s HVCC effort this February, Cuomo stayed on track and got Fannie and Freddie’s regulator (the FHFA) to agree to hold the agencies accountable to the rules. With Cuomo prevailing, HVCC finally took effect May 1, 2009.
The mortgage lobby won one battle though, allowing banks to keep in-house appraisal units and to own stakes in appraisal management companies (AMCs), as long as the mortgage broker and loan officers don’t pick the appraiser. If this Chinese wall is broken and complaints are submitted to regulators, then government-controlled Fannie Mae and Freddie Mac is not supposed to buy their loans on the secondary market. Today these agencies buy about 85 percent of the banks residential mortgage loans – a function that is critical to banks that need to free up capital so they can make new loans.
Consumer advocates like Rheingold worry that the HVCC rules that did get implemented only half-way solve the problem. Rheingold states that Cuomo’s original guidelines, demanding fully-independent appraisal management companies, would have gone a long way to prohibit abuse in the system. The rules that did get implemented, however, allow bank ownership of AMCs to continue. Thus, including full and partial, direct and indirect ownership, four big banks now control over 80 percent of the appraisal market under HVCC. Not only does BofA own Landsafe, but Wells, Citi, and JP Morgan have ownership interests in appraisal subsidiaries/joint ventures of First American and Fidelity/LSI ServiceLink. Worries are that this system may hinder attempts to truly change the culture.
As far as the GSEs, Rheingold added “If you give Fannie and Freddie and inch they take a mile. Unfortunately, the current HVCC guidelines give them a lot more than an inch.â€
Glaser adds, “HVCC should help slow appraisal fraud, but a company like Landsafe really needs to change their Top to Bottom practices and their management to stop the abuse.”
Notes: (i) An earlier version of this story incorrectly stated that “ in a feature story out this month in HousingWire magazine, DeSoer admitted integrating “distinct lending systems” across BofA and Countrywide is just getting underway.” DeSoer’s comment actually applied to servicing platforms. The sentence was removed.
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By Aman Makkar | April 2, 2009
| A new survey shows lenders are confident of having their systems compliant with the HVCC in time for the May 1 deadline, although few have actually finished their system upgrades – yet. Read on for the full survey details. |
| (4/2/2009) |
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With just one month to go, U.S. mortgage lenders are confident that their systems will be ready to support compliance with the Home Valuation Code of Conduct (HVCC) by the imposed May 1 deadline, yet remarkably few say they have actually completed system upgrades designed to ensure compliance.
These conclusions result from a survey distributed last week to more than 1,000 contacts of mortgage technology company FNC Inc. The survey was interesting for two key reasons:
- Most lenders are yet to put their systems in place, with a significant number of them (20 percent) not confident of meeting the HVCC deadline at all.
- The variety of systems being employed by the lenders: no one system stood out above the rest. The mixture included single vendor management companies (VMCs), multiple VMCs, software vendors and internal processes.
According to the survey, almost 80 percent of respondents felt confident that their systems would be ready to comply, but with the deadline a month away, only 14 percent had completed the necessary upgrades.
“Some lenders may not be fully aware that their systems and processes will require significant changes to avoid penalties associated with selling their new originations to the GSEs after May 1,” said Jon Fisher, FNC’s HVCC implementation expert.
When asked what systems they would use-either their own or a third-party solution-the response was mixed:
- 21 percent said they would use their own internal proprietary processes.
- 18 percent would use a VMC to ensure compliance on their behalf.
- 15 percent would choose a full-purpose software vendor.
- 12 percent indicated they would choose multiple VMCs.
Of those who had already secured a compliance solution prior to completing the survey, most said they chose either their own proprietary system or a full-purpose software vendor; 13 percent selected multiple VMCs; and 6.7 percent chose a single VMC.
On May 1, the Home Valuation Code of Conduct is scheduled to take effect, mandating that all new loan originations sold to Fannie Mae and Freddie Mac comply with strict rules established to mitigate the risk assumed by these two government-sponsored enterprises (GSEs).
(update from Valuation Review)
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By Aman Makkar | April 2, 2009
McLean, Virginia, April 2, 2009 – In February 2009, the National Association of Mortgage Brokers (NAMB) filed suit against the Federal Housing Finance Administration (FHFA) to block implementation of the Home Valuation Code of Conduct (HVCC), which will inhibit competition among mortgage originators and increase the cost of mortgages to consumers. NAMB’s suit asserted that the HVCC constituted a “de facto” rulemaking that did not comply with the requirements of the Administrative Procedures Act (APA), which sets out the procedures a federal agency must follow when issuing a regulation.
Today, NAMB has withdrawn its lawsuit against the FHFA. NAMB invoked this strategic maneuver to assess means by which we can refute the FHFA’s claim that no court may review their decisions while the GSE’s are in conservatorship. NAMB believes the FHFA’s claim that there are no legal limits on the arbitrary and unilateral use of their conservatorship power is unprecedented and will prove detrimental to consumers.
“This issue goes beyond the bounds of this particular case,” said NAMB President, Marc Savitt, CRMS, “All companies, investors, and trade groups should understand there may not be a court, any court, able to hear their case while FHFA is utilizing their conservatorship powers.”
NAMB strongly opposes FHFA’s position that it does not need to comply with the APA and other laws. NAMB has withdrawn its lawsuit against FHFA, without prejudice, as it assesses various means to challenge FHFA’s extraordinary claim. Those options include filing suit again with revised and expanded arguments directed at FHFA’s new claim.
(update from namb.org)
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By Aman Makkar | April 2, 2009
| Indiana becomes the latest state to outlaw the improper influence of appraisers, making any offense a Class A misdemeanor. Read on for the full details. |
| (3/31/2009) |
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In response to the growing rise of appraisal fraud many states have passed legislation prohibiting the improper influence of appraisers. Indiana is the latest state to pass such a law.
HB1176, known as the residential mortgage lending practices act, was sponsored by state senator Dennis Kruse. In it, appraisal influence is made illegal, though not using the exact wording adopted by other states in similar legislation.
Section 7 of HB1176 reads as follows:
A person shall not corrupt or improperly influence, or attempt to corrupt or improperly influence:
(1) the independent judgment of a real estate appraiser with respect to the value of the real estate that is the subject of a real estate transaction; or
(2) the development, reporting, result, or review of an appraisal prepared in connection with a real estate transaction; through bribery, coercion, extortion, intimidation, collusion, or any other manner.
Any violation of the law will result in a Class A misdemeanor and a civil penalty of up to $10,000. In addition, the offender could be subjected to an investigation by Indiana’s attorney general. To help with complaints, the act also includes a hotline and email address for anyone, including appraisers, wishing to report a violation.
The act goes into effect July 1, 2009. Go here to read the bill in full.
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By Aman Makkar | April 1, 2009
Earlier this week, the governors of Utah and Arkansas signed the nation’s first laws that will bring appraisal management companies under the regulatory oversight of their state’s real estate appraiser boards. In addition to the registration requirements, the new Utah and Arkansas laws, which are effective on May 12, 2009 and January 1, 2010 respectively, require that AMCs have systems in place to verify that only licensed or certified appraisers are used. AMCs must also ensure that all appraisals comply with the industry’s Uniform Standards of Professional Appraisal Practice. Additional language is included in each law to ensure that appraisers are free from inappropriate influence and coercion from AMCs.
One element that is unique to the Arkansas law is a requirement that AMCs operating in Arkansas post a $20,000 surety bond with the board. Any party, including an appraiser that has a claim against an AMC, can bring suit to recover funds from the bond. The only exception is that a consumer’s claims takes precedence over all other claims. In lieu of a surety bond, an AMC can make a deposit of cash or securities.
In a letter to Gov. Jon Huntsman, the Appraisal Institute and other appraisal community organizations stated, “We congratulate the State of Utah for its leadership role in becoming the first state in the nation to enact requirements that appraisal management companies register with, and be regulated by, a state agency.†The appraisal organizations will also be writing to Gov. Beebe to thank him for his action on his state’s version of this important legislation.
According to the chief sponsor of the Utah law, Rep. Michael Morley, appraisal management companies may be inclined to hire the lowest-cost appraisers rather than the most appropriately qualified in order to boost profits. Rep. Morley added that appraisal management companies often hire inexperienced appraisers who are susceptible to pressure from lenders or mortgage brokers to come up with a predetermined valuation.
Utah State Rep. Jack Draxler, a member of the Appraisal Institute from North Logan, Utah added, “If we want the integrity of the process to go forward, if we want to prevent mortgage fraud, appraisal management companies should come under the same set of standards as the rest of the people operating in this very, very critical industry.â€
(update from Appraisal Institute)
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By Aman Makkar | April 1, 2009
On March 31, Fannie Mae and Freddie Mac released an updated Frequently Asked Questions regarding the Home Valuation Code of Conduct that is set to take effect May 1, 2009. Highlights of the FAQ include sections regarding mortgage broker initiation of the appraisal process, quality control, and loan production staff training.
In its FAQs, Fannie and Freddie reiterated that all appraisers must be licensed or certified by the state in which the property is located; that lenders are permitted to use in-house appraisers, provided the lender is in full compliance with other sections of the code; and that lenders are not permitted to use appraisal reports completed by an appraiser “selected, retained or compensated in any manner by mortgage brokers and real estate agents.â€
Fannie and Freddie clarified a mortgage broker can initiate an appraisal request through a lender’s designated appraisal management company, and presumably, a designated appraisal company. Further, Fannie and Freddie also clarified that a lender may direct a broker to use a Web portal set up either by the lender, or by the lender’s authorized agent, through which the broker inputs a request for an appraisal and then triggers the lender’s system to order an appraisal.
The two lenders also said that they are working with the New York State Attorney General, as well as the Federal Housing Finance Agency, to finalize the details of the Independent Valuation Protection Institute. They reiterated that since the Institute has yet to be established, the provisions regarding it in the Code are not yet effective.
(update from Appraisal Institute)
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By Aman Makkar | April 1, 2009
The Code
- What loans are impacted by the Code?
On and after May 1, 2009, Freddie Mac will not purchase mortgages from Sellers that do not adopt the Code with respect to single-family mortgages that are delivered to Freddie Mac.
- Is the Code only applicable for loans originated in New York State?
No, the Code applies to all geographic locations.
- Is every Freddie Mac Seller obligated to follow the Code?
Yes. All Freddie Mac approved Sellers must adopt the Code.
- Does the Code apply to non-origination valuation activities such as loss mitigation activities?
The Code only applies to the loan origination process. It does not apply to a lender’s foreclosure/REO process, workouts, or any other type of loss mitigation activity.
- How will you handle issues and concerns raised by customers as the Code is implemented?
Freddie Mac will work with our customers to address any issues or concerns regarding implementation of the Code. We will maintain ongoing contact through our various communications channels including newsletter articles and Web content. If customers have immediate questions, they should contact their Freddie Mac account representative or send an email to us at our Home Valuation Code of Conduct mailbox.
Effective Dates
- Is there a time limit for delivering mortgages with application dates prior to May 1, 2009, but which closed after May 1, 2009?
No new delivery time limits have been imposed as a result of the Code. Mortgages with application dates prior to May 1, 2009, can be delivered after May 1, 2009.
- Will the Code apply to mortgages with application dates that precede May 1, 2009?
No. Mortgages with application dates prior to May 1, 2009, that are delivered after May 1, 2009, are not required to comply with the Code. However, beginning with deliveries on May 1, 2009, lenders must represent and warrant they have in place the structure, policies, and procedures required to comply with the Code.
- What does it mean to adopt the Code on May 1, 2009?
Lenders must represent and warrant that as of May 1, 2009, they have in place the structure, policies, and procedures required to comply with the Code and that appraisals used for mortgages with application dates on or after May 1, 2009, were obtained in a manner consistent with the Code.
Ordering & Paying for an Appraisal
- Are lenders permitted to use in-house appraisers to obtain appraisals?
Yes. Lenders are permitted to use in-house appraisers to obtain and prepare appraisal reports if the lender is in compliance with Section IV.B. of the Code.
- Are lenders permitted to use appraisers who have been selected or retained by a mortgage broker or real estate agent?
No. The Code specifically prohibits lenders from accepting appraisal reports completed by an appraiser selected, retained or compensated in any manner by mortgage brokers and real estate agents. Please refer to Section III.A. of the Code for further information regarding who is authorized to select and retain appraisers.
- Are lenders allowed to use appraisals ordered by appraisal management companies that provide other settlement services for the same transaction?
Yes. Lenders may use appraisal management companies to obtain appraisals as long as they comply with the requirements of Section IV.C. of the Code.
- If a lender finds an error or problem with an appraisal, is the lender allowed to contact the appraiser to correct the error?
Yes. Nothing prohibits the lender from requesting that an appraiser (i) provide additional information or explanation about the basis for valuation or (ii) correct objective factual errors in an appraisal report as outlined in Section I.C. of the Code.
- Is appraiser communication with the loan production staff acceptable when the appraiser cannot gain access to a property or locate an address?
Communication between the loan production staff and the appraiser for issues of this nature are permissible under the Code. Conversations that relate to or have an impact on valuation, however, are not permitted under the Code.
- What does it mean to “order” an appraisal?
Ordering an appraisal means engaging the appraiser’s services to perform an appraisal of a specific property. The party that orders an appraisal is the party that the appraiser identifies in the lender/client field on the appraisal report.
- Can a broker initiate an appraisal request through a lender’s designated appraisal management company (AMC)?
This process is permissible provided all of the following criteria are met:
- The AMC is specifically authorized by the lender to act on its behalf and the AMC is not acting on behalf of the mortgage broker,
- The AMC selects, retains, and provides for payment of all compensation to the appraiser on the lender’s behalf,
- The appraiser’s client is the lender and the appraiser correctly identifies the lender as the lender/client on the appraisal report,
- The lender has policies and procedures in place that comply with the Code, and
- The lender ensures that the AMC has policies and procedures in place that comply with the Code.
- May a lender direct a broker to use a Web portal set up either by the lender, or by the lender’s authorized agent, through which the broker inputs a request for an appraisal and then triggers the lender’s system to order an appraisal?
Yes. A lender may direct a broker to use a Web portal in this manner.
- Does the Code permit a broker to select an appraiser from the lender’s list of approved appraisers, if the lender is responsible for the relationship with the appraiser, including compensation?
No. The Code prohibits lenders from relying on an appraisal where the broker had a role in selecting, retaining, or compensating the appraiser.
- Can brokers select a specific appraisal management company (AMC) if the lender works with more than one AMC?
No. If the lender works with more than one AMC, the lender must select the AMC. The mortgage broker cannot select from a list of approved AMCs.
- Does the Code require appraisals to be ordered through an appraisal management company (AMC)?
No. The Code does not require appraisals to be ordered through an AMC.
- Who may directly pay an appraiser for appraisal services?
Only the lender or a third party specifically authorized by the lender (including but not limited to appraisal companies, appraisal management companies (AMCs), and correspondent lenders) may directly pay an appraiser for appraisal services.
Lenders may charge the broker or the borrower for the appraisal fee. An AMC may accept the appraisal fee from the broker or the borrower, provided:
- The AMC is specifically authorized by the lender to act on its behalf,
- The AMC accepts the borrower’s/broker’s payment on behalf of the lender and not on behalf of the appraiser,
- The AMC selects, retains, and provides for payment of all compensation to the appraiser on the lender’s behalf, (not the borrower’s behalf),
- The appraiser’s client is the lender and the appraiser correctly identifies the lender as the lender/client on the appraisal report,
- The lender has policies and procedures in place that comply with the Code, and
- The lender ensures that the AMC has policies and procedures in place that comply with the Code.
- Can trainee appraisers still complete appraisals?
Trainees can continue to perform appraisal work. The supervisory appraiser who signs the report must meet the licensing/certification requirements.
Appraisal Transfers, Second Appraisal, and AVMs
- Can lenders accept appraisals transferred from another lender?
A lender may accept an appraisal from a different lender if both of the following criteria are met:
- The lender receiving the transferred appraisal obtains written assurances that the original lender has adopted and complied with the Code in connection with the loan being originated; and
- The lender receiving the transferred appraisal determines that the appraisal conforms to its own requirements and is otherwise acceptable.
A lender may also accept an appraisal from an appraisal management company (AMC) specifically authorized by the original lender to act on its behalf if the lender receiving the transferred appraisal obtains written assurances from the original lender that the appraisal was obtained in a manner consistent with the Code.
- What documentation is required during an appraisal transfer to demonstrate that the lender transferring the appraisal is complying with the Code?
Each lender must develop its own documentation requirements to ensure compliance with the Code, based on its business model and processes.
- Is a second appraisal or Automated Valuation Model (AVM) permitted in a lender’s foreclosure/REO processes?
Yes. The Code does not apply to the lender’s foreclosure/REO process.
- Are lenders permitted to order a second appraisal or AVM on high-value or unique properties to ensure the most accurate value is obtained?
Yes, as long as such appraisal or AVM is done pursuant to:
- Written, pre-established bona fide pre- or post-funding appraisal review or quality control process or underwriting guidelines.
- Lender adherence to a policy of selecting the most reliable appraisal as stated in Section I.B. (9) of the Code.
Appraisal Report Copies
- What information are lenders required to provide to borrowers to comply with the Code?
Lenders are required to provide the borrower with a copy of each appraisal report a minimum of three days prior to closing, unless the borrower waives this three-day requirement.
- Is it acceptable for a lender to provide brokers and loan production staff a copy of the completed appraisal?
The Code does not specify when or to whom a copy of the appraisal can be provided. The Code states that borrowers must receive a copy of the appraisal a minimum of three business days prior to closing unless they waive the three-day requirement.
- Can an appraiser’s information be omitted from the appraisal report prior to sending it to the borrower?
No. A complete, unaltered copy of the appraisal report must be provided to the borrower.
- If two appraisals are obtained as part of the underwriting process, does a lender have to provide copies of both appraisal reports to the borrower or only a copy of the appraisal used to determine value?
Section II of the Code requires that the borrower be provided with a copy of “any” appraisal report; therefore, copies of all appraisal reports obtained must be provided to the borrower.
- If the appraisal is not completed three days before closing, is it still necessary to obtain a waiver from the borrower for a copy of the appraisal report?
Yes. The borrower must waive the three-day requirement or the loan closing must be postponed.
- Can a lender create a form to document the borrower’s waiver of the right to receive a copy of the appraisal report at least three days prior to the closing?
A lender may choose to create a form to document the borrower’s waiver. The borrower must acknowledge agreement of the waiver, but the lender can determine the method of agreement.
- Does the borrower have to receive the appraisal report three business days or three calendar days before closing?
The copy of the appraisal report must be received by the borrower three business days before closing.
- Does the requirement that the lender provide a copy of the appraisal report three days before closing begin when the appraisal report is sent by the lender or upon receipt by the borrower?
The borrower must receive a copy of the appraisal three business days before closing.
- Please clarify the requirement that a completed appraisal report be provided promptly upon completion?
The terms “promptly upon completion†and “completed appraisal†refer to when the lender has reviewed and accepted the appraisal.
- If I am permitted to use an AVM such as Home Value Explorer (HVE) to estimate property value, am I required to meet the Code requirements in Section II and provide the borrower with a copy of the AVM result three days before closing?
The Code does not require lenders to provide borrowers a copy of an AVM result.
Small Bank Exemption
- My institution is already required to comply with federal regulations regarding appraisals. Does this exempt my institution from the Code?
No. All Freddie Mac Sellers must comply with the Code, which has been added as an Exhibit to the Guide.
- Section IV.E of the Code allows an exemption to Section IV if the lender meets the definition of “small bank” and Freddie Mac determines the lender would suffer a hardship due to the provisions provided in Section IV of the Code. What are the requirements for this provision?
An institution falls under the provisions of Section IV.E of the Code if it is a regulated financial institution with aggregate assets of not more than $250 million, as specified in 12 U.S.C. §2908, and meets the requirements, if any, of the institution’s regulatory agency regarding the Interagency Appraisal and Evaluation Guidelines (SR Letter 94-55 and revisions). As with the entire Code, this provision is subject to Freddie Mac’s representations and warranties. Sellers falling under Section IV.E are still required to comply with the remainder of the Code, including Section III, which duplicates many of the requirements of Section IV. Please note that the asset value as specified in 12 U.S.C. §2908 is updated periodically and you must continue to meet the statute requirements with regard to the Code when the value is updated.
- Is a lender required to submit documentation to Freddie Mac to take a Section IV.E small bank exemption?
Freddie Mac does not require a lender to submit documentation to become exempt pursuant to Section IV.E of the Code. A lender claiming this exemption, however, represents and warrants that it meets the criteria of Section IV.E.
Loan Production Staff & Training
- Does the Code’s definition of loan production staff include underwriters and processors?
The loan production staff consists of those responsible for generating loan volume or approving loans, as well as their subordinates. This would include an employee whose compensation is based on loan volume or the closing of a loan transaction. Employees responsible for the credit administration function or credit risk management are not considered loan production staff.
- What does it mean to be appropriately trained and qualified in the area of real estate appraisals?
Each lender must determine what constitutes adequate training and qualifications. At a minimum, the trained and qualified individual must understand the Code, appraisal regulations and enforcement, as well as the Uniform Standards of Professional Appraisal Practice.
- Can non-commissioned employees who order appraisals report to the same person as the loan production staff?
No. Section III (B) of the Code prohibits any person who reports to an individual connected to the loan production staff from ordering an appraisal.
Quality Control
- Would Freddie’s Mac’s in-house quality control requirements outlined in Guide Chapter 48 be sufficient to meet the Code’s quality control requirements?
Yes. Our Guide Chapter 48 quality control requirements will satisfy the Code’s quality control requirements.
- How is a “statistically significant percentage†in Section VI defined?
The Code requires a random sampling of either 10 percent of all appraisals or valuations that are used by the lender, or another bona fide statistically significant percentage. The sample is considered a bona fide statistically significant sample if the sample is representative of the population, and inferences and conclusions made from the sample can be extended to the population as a whole.
- Is a quality control review required for all valuation methods included in the mortgage file (i.e., full appraisal, AVM, desk review, field review)?
The quality control review must be performed on the valuation method that was used for determining the loan-to-value (LTV) for the transaction.
Non-Compliance / IVPI
- Is a loan eligible for sale to Freddie Mac if the lender purchased the loan from a correspondent that did not comply with the Code in originating that loan?
No. It is the lender’s responsibility to ensure that all loans it purchases with intent to deliver to Freddie Mac are in full compliance with the Code. Effective May 1, 2009, Freddie Mac will no longer purchase mortgages from Sellers that do not adopt the Code with respect to single-family mortgages that are delivered to Freddie Mac. Also, effective for single-family mortgages with loan application dates on or after May 1, 2009, Freddie Mac Seller/Servicers must represent and warrant that the appraisal report is obtained in a manner consistent with the Code. See also Section III.A. of the Code.
- What does the Code require a lender to do if a lender has reason to believe that an appraiser or appraisal management company is violating the law or practicing unethical conduct?
As outlined in Section VII of the Code, the lender must promptly refer the matter to the applicable state appraiser certifying and licensing agency.
- What are the penalties for violations of the Code?
As discussed in Section VIII of the Code, Freddie Mac will treat breaches of the Code the same as any other breach of a Seller’s representations and warranties. This could include suspension or termination of the lender’s eligibility to sell loans to Freddie Mac if the lender fails to remediate violations.
- When will the Independent Valuation Protection Institute be established?
We are working with the New York State Attorney General, FHFA, and Fannie Mae regarding the Institute. The timing is still being determined. As details are finalized, we will notify Freddie Mac Sellers. Because the Institute has not yet been established, the provisions regarding it in the Code are not yet effective.
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By Aman Makkar | April 1, 2009
Indiana is the latest state to outlaw any influence on a real estate appraiser. This legal update continues the trend of states taking action to create a fair and just system. We’ve lacked many checks and balances over the last ten years, and it’s haunting us each and every day. This new bill is addressing legal ramifications for those who do not abide by the new Home Valuation Code of Conduct (HVCC). See digest below for more information on the bill.
DIGEST OF HB1176 (Updated March 24, 2009 3:42 pm – DI 84)
Residential mortgage lending practices. Provides that in the case of a first lien mortgage transaction or a home loan that: (1) is closed after June 30, 2009; and (2) has an interest rate that is subject to change during the term of the loan; the creditor may not contract for and may not charge the debtor or borrower a prepayment fee or penalty. Provides that a person shall not corrupt or improperly influence, or attempt to corrupt or improperly influence, a real estate appraiser or an appraisal. Provides that a proposed new notice that is to be: (1) prescribed by the attorney general’s homeowner protection unit; and (2) provided by a creditor to a prospective borrower not later than three business days after the creditor’s receipt of the borrower’s mortgage loan application; must include a statement of a borrower’s right under the federal Real Estate Settlement Procedures Act to inspect the HUD-1 or HUD-1A settlement statement during the business day immediately preceding settlement. Provides that the annual report provided by the mortgage lending and fraud prevention task force to the legislative council must include the following information for the most recent state fiscal year: (1) The number of complaints or reports received by the unit concerning suspected violations of the prohibition against corrupting or improperly influencing a real estate appraiser or an appraisal. (2) A breakdown of the sources of the complaints or reports, based on the complainants’ interest in or relationship to the real estate transactions upon which the complaints or reports are based. (3) A description of any disciplinary or enforcement actions taken, or criminal prosecutions pursued, in connection with the complaints or reports received. Sets forth certain penalties and enforcement procedures for violations of the provisions concerning real estate appraisals. Requires a foreclosure consultant to retain all records related to services performed on behalf of a homeowner for at least three years after the termination or conclusion of the foreclosure consultant contract. Prohibits a person from engaging in, or soliciting to engage in, a real estate or mortgage transaction without a permit or license required by law. Prohibits a person from making certain representations with respect to: (1) a mortgage or real estate transaction; or (2) the property that is the subject of the transaction; if the representation is not true and the person knows or reasonably should know that the representation is not true. Provides that a practitioner of a licensed profession who has been subjected to disciplinary sanctions by the board that regulates the profession may be required to pay the costs of any real estate review appraisal obtained in connection with the disciplinary proceedings. Provides that a violation of the statutes concerning: (1) credit service organizations; and (2) mortgage rescue protection fraud; by a person licensed or required to be licensed as a real estate salesperson or broker is a violation of the statute governing the regulation of real estate salespersons and brokers and is subject to certain specified enforcement procedures and sanctions.
Specifies that the board that regulates a licensed profession may not approve the surrender of a practitioner’s license if the attorney general’s office: (1) has filed an administrative complaint concerning the practitioner’s license; and (2) opposes the surrender.
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By Aman Makkar | April 1, 2009
New Home Valuation Code of Conduct regulations in effect on May 1, 2009, require mortgage professionals to change the way they do business with appraisers
PLEASANTON, CA—March 13, 2009—Ellie Mae, the leading provider of loan processing software for mortgage bankers, brokers and other third party originators, announces its HVCC-Compliant Appraisal Services, a new program designed to help banker, lender and broker clients to fully comply with the Home Valuation Code of Conduct (HVCC) that goes into effect on May 1, 2009.
“The Home Valuation Code of Conduct’s guidelines will require mortgage professionals to change the way they do business with appraisers,” says Ellie Mae’s senior vice president, Richard Roof. “After May 1, originators who fail to comply with the HVCC may be faced with penalties, the inability to sell loans, or in the case of brokers, will be unable to submit their loan applications to the wholesale lender of their choice.”
Ellie Mae’s HVCC-Compliant Appraisal Services will leverage technology enhancements, partnerships with appraisal management companies (AMCs), and direct connection via the ePASS Network to facilitate HVCC-compliant ordering and delivery of appraisals for Ellie Mae’s banker, broker and lender clients, who together originate 50 percent of the nation’s third-party origination loan volume, and 25 percent of the nation’s mortgages each year. With the HVCC-related enhancements to the Encompass Mortgage Management Solution, companies gain the ability to control which staff members can electronically order appraisals, create rules based on property location and loan type, and create and manage their own appraisal panels. Users will also be able to connect directly with top appraisal management companies that are integrated to the ePASS Network. Ellie Mae is working with correspondent and wholesale lenders to incorporate solutions that enhance appraisal portability and simplify lender re-certifications.
The Home Valuation Code of Conduct was established by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency (formerly OFHEO). In short, the HVCC sets forth a series of guidelines that govern appraisal-related activity among mortgage companies for loans that are sold to Fannie Mae and Freddie Mac, in an effort to reduce the risks associated with the appraisal process. Most of the HVCC’s stipulations are focused around ensuring objectivity in ordering real estate appraisals by brokers and correspondent lenders. Fannie Mae and Freddie Mac will not accept loans on or after May 1, 2009 that do not adhere to the Home Valuation Code of Conduct.
Ellie Mae’s HVCC-Compliant Appraisal Services will be comprised of the following:
- Encompass product enhancements that enable correspondent lenders to manage and administer their HVCC policies, manage their own appraisal panel, compliantly order appraisals from appraisal management companies integrated into Encompass, and access all appraisal related documents and information via the Encompass eFolder.
- Partnerships with the industry’s most widely approved appraisal management companies, as well as appraisal management companies that are successfully targeting the third party originator market.
- A “black box” appraisal center that will enable “blind” HVCC-compliant appraisal ordering for wholesale lenders and their mortgage brokers, enhancing appraisal portability and simplifying lender re-certifications.
- New automated valuation models and additional valuation services, available to all originators at the point of sale through the Encompass network, to help assure that loans are properly pre-qualified and targeted.
Several of the industry’s most widely accepted and leading appraisal management companies have partnered with Ellie Mae to participate in the HVCC-Compliant Appraisal Services program, including First American eAppraiseIT, ServiceLink, Finiti, StreetLinks, and AppraiserLoft. Three appraisal management companies that are also participating are also already integrated into the Encompass network: CBCInnovis, DartAppraisal.com and Nations Valuation Services. Ellie Mae plans to continue adding appraisal management companies on a case-by-case basis.
Roof adds, “Ellie Mae’s HVCC-Compliant Appraisal Services alleviate the burden of compliance by providing mortgage professionals with the tools to quickly, easily and electronically procure appraisals according to Home Valuation Code of Conduct guidelines, at no additional cost to the mortgage banker, lender or broker.”
About Ellie Mae, Inc.
Ellie Mae is an award-winning provider of software and services for the mortgage industry, offering comprehensive business solutions for mortgage bankers, mortgage brokers and lenders. The company’s key offerings include the flagship Encompass® Mortgage Management Solution, Encompass CenterWiseâ„¢ and Encompass Closer. More than 120,000 mortgage professionals use the Encompass Mortgage Management Solution, including two-thirds of the nation’s top 300 brokers. Ellie Mae, recipient of the prestigious Inman Award as the most innovative company in the mortgage industry, is recognized for developing technology that links the many parties critical to the mortgage origination industry through its patented ePASS® Network. One quarter of the nation’s almost $2 trillion in new mortgages originated every year pass through the ePASS platform, enabling mortgage companies to easily and securely conduct electronic business transactions with dozens of leading lenders and more than 2,000 settlement service providers. Ellie Mae is also the parent of Online Documents, the industry’s leading provider of flexible, compliant electronic mortgage documents and related services for the mortgage industry. Ellie Mae was founded in 1998 and is based in Pleasanton, California. To learn more about Ellie Mae, visit www.EllieMae.com or call 877.355.4362.
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© 2009 Ellie Mae, Inc. All rights reserved. Ellie Mae, Encompass, and ePASS (patent No. 7,444,302) are registered trademarks and Encompass CenterWise and Encompass Closer are trademarks of Ellie Mae, Inc. in the United States.
PRESS CONTACT:
Rosalie Berg
Strategic Vantage Marketing & Public Relations
(305) 971-5352
PR@StrategicVantage.com
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By admin | March 31, 2009
| Fannie Mae’s 1004MC Market Conditions Addendum form comes into effect tomorrow, April 1. Valuation Review looks at some of the issues surrounding the form, and offers practical advice on dealing with the changes. |
| (3/31/2009) |
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As of April 1, the new 1004MC Market Conditions Addendum form, known as the 1004MC, comes into effect. Fannie Mae’s form will be required for all mortgage loans delivered to the GSE with appraisals of one- to four-unit properties.
According to Fannie, the 1004MC is intended to give the lender a better understanding of the market trends and conditions prevalent in the subject neighborhood. It gives appraisers a structured format to report the data and identify current market trends and conditions.
But the form has attracted criticism from appraisers on both sides of the argument. Some see the form as not going far enough, while others aren’t happy at the extra time filling out the form will incur, and have considered increasing their fees to undertake the extra work.
Here are some of the issues that have surfaced since the 1004MC was first proposed.
Anticipated problems
Tracy Martin, veteran appraiser and USPAP instructor for McKissock, thinks part of the form could be confusing:
“The instructions call for the information to support the conclusions presented in the Neighborhood Section, which considers all SFR properties in the neighborhood, but the data required to be presented on the 1004MC is supposed to reflect those sales and listings that would compete with the subject (in the prospective buyer’s opinion).
The appraisers will need to understand this and be able to explain that the data may present different “pictures.” For example, while the neighborhood in general may be exhibiting signs of stability, for a subject property that is the anomaly, the competing data may exhibit signs of extreme decline.â€
So the best the appraiser can do is to explain where the subject and the competing properties (from the 1004MC) “fit” into the larger picture of the neighborhood.
Another potential snag with the new form is the disparity of that data across regions. Sandra K. Adomatis, SRA, who teaches the “Appraisal Challenges: Declining Markets and Sales Concessions†course for the Appraisal Institute, believes this will make the form difficult for some appraisers.
“On some of the MLSs, I can go in, pull up sales and tell it to give me a statistics report. It will give me the information I need to include in here (the 1004MC) if I run my criteria correctly,†she said. “But some appraisers won’t be so fortunate to have MLSs that sophisticated. The biggest problem will be if they’re in a rural area where they don’t have the databases. Those areas will be difficult just because of the circumstances.â€
One respondent to the 1004MC-related reader poll Valuation Review conducted earlier this year shared similar concerns about the regional variations in data availability and market trends. A single market analysis form won’t be a good fit for all areas, he said.
“The data required is not applicable in their (Fannie’s) format to all markets,â€â€ˆthe appraiser wrote in his poll response. “My local market is seasonal in nature and provided data on the prior three, six or 12 months isn’t representative of local market trends.â€
Extra work = extra pay?
Although a number of appraisers already do the work that is required in the 1004MC, others see the extra effort as being a further burden on their time, and therefore requires an increase in pay. Respondents to our online poll on the 1004MC suggested raising their fee by $50 – $100.
Wachovia Valuation Services’ Chief Appraiser Rick Langdon doesn’t think the extra work justifies the hike in fees: “The last time I looked at the 1004, it requires the appraiser to report housing trends. So we currently do, or should be doing, this type of analysis already regardless of the reporting format. Now that you’ve been asked to report your analysis, you want more money? I am not sure that I agree with that.â€
Langdon also said, “We have requested similar data from our staff and contract appraisers in the past and have not paid them anything extra.â€
More market analysis
Another reaction to the 1004MC concerns the need for more analysis on market conditions.
Tracy Martin welcomes the extra analysis that the form calls for: “Too few residential appraisers provide the detail necessary for an intended user to fully understand the workings of the neighborhood/market. I am not convinced that requiring this type of form will solve the problem, but at least it will “force” appraisers to attempt more in-depth analyses.â€
But Sara Schwarzentraub, SRA, owner of Inter-State Appraisal Service and an expert on market analysis and teaches courses on the subject for the Appraisal Institute believes the form doesn’t reach far enough:
“The 1004MC is kind of like Market Analysis 101. It’s pretty basic. It’s really stuff that appraisers should be doing now,†she said. “Who knows whether they’ll just fill in the blanks as they do on the URAR form? That is always my concern.â€
Although Fannie has provided instructions on how to use the form, there’s still no education to teach the appraiser why market analysis is so important, she said:
“If appraisers don’t understand what kind of market they’re in before they start, they may end up overvaluing certain features and undervaluing other ones. The market analysis has to come first. It’s on page 1 for a reason, and it needs to be the first part of the appraisal process.â€
How to deal with the changes
Schwarzentraub shared the following advice on providing useful analysis in your reports, some of which goes beyond the requirements of the 1004MC:
- Always calculate average days on market (DOM) in your analysis. That statistic can be a bellwether indicating market changes, even before volume changes significantly.
- Track expired listings. When the market is healthy, there aren’t any, so this is another early indicator that the market is about to shift in some fashion.
- Be more specific. The line that reads “Are foreclosure sales (REO sales) a factor in the market?†should motivate appraisers to provide a specific ratio of REOs to conventional and government sales. Some markets might consist entirely of REOs, whereas others might be 10, 30 or 50 percent REO, for example.
- Always do market analysis before selecting comparables. Better market analysis that will help make better decisions on the grid, even in terms of adjustments.
Joseph H. Guerry, SRA and owner and chief appraiser of Guerry Group is worried that appraisers in slow markets might try to perform market analysis and determine trends using too few comparables.
Guidelines on appropriate sample sizes will vary from market to market, he said, but samples of less than 20 to 30 properties will likely be too small. He recommends the following:
- Run the analysis using a small amount of properties (six, for example).
- Expand the criteria you’re using for the analysis to enlarge the set.
- Examine the results. If you increase from six to 12 properties or 12 to 24 in the data set and see a dramatic change in the result, you don’t have enough data. If you go from 25 to 50 and don’t see a dramatic change in the results, you’ve probably reached a statistical quantity that’s reliable, he said.
Educate Yourself
The experts all agree on one thing: that appraisers who are unsure about the 1004MC need to get as much education on the matter as possible. As well as continuing education courses offered by the likes of the Appraisal Institute, there are steps you can take on your own:
· Learn how to become efficient with a spreadsheet program, and to create charts, graphs and tables.
· Create and maintain a master database of data, rather than individual work files.
· Get familiar with the 1004MC software that’s on the market.
· Ask other appraisers how they are using the new form. Learn what you can from your peers.
Article from Valuation Review (http://tinyurl.com/cjffq7)
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