In monarchies of old, it is said that whenever a King or Queen died, the courtiers would lament the passage of the old ruler and usher in the new in the same breath. While chants of “The King is dead! Long live the King!” are stuff of legend and lore, it seems appropriate to make the comparison to Friday afternoon’s announcement by both Fannie and Freddie regarding the “new” Appraiser Independence Requirements to replace HVCC effective November 1, 2010 at the latest.
As promised, we are providing you with a synopsis of the release. Here are the highlights:
1) Under the new requirements, lenders selling to Fannie or Freddie are still responsible for engaging (ordering appraisal reports from) appraisers. This can be done through lender roster appraisers, lender-approved appraisal management companies or through correspondent lenders who may have their own appraisers or appraisal management company relationships. In no case is a true third-party (including mortgage brokers) allowed to compensate appraisers or order appraisals unless through a lender-approved Appraisal Management Company (AMC). Much to the chagrin of most mortgage brokers, there is essentially no change from the existing HVCC requirement here.
2) Lenders must continue to keep the origination function completely isolated from the appraisal function. In other words, any employee who works in mortgage origination (or “sales”) should not order an appraisal or “have any substantive communications with an appraiser or AMC relating to … valuation or having an impact on valuation, including ordering or managing an appraisal assignment.” The only change from the existing HVCC requirement is that AMCs are now explicitly included on the list of prohibited contacts for sales/origination employees. Also, an exception to these requirements has been added for small entities who truly can’t keep the two functions absolutely separate, as long as they have “prudent safeguards” in place to ensure that no influence or interference with appraisals occurs from a sales employee. Note that this exemption only applies to entities that are actually selling loans to Fannie and Freddie, NOT to correspondent lenders or brokers.
3) Lenders are now explicitly permitted to order appraisals from Appraisal Management Companies who are affiliated with them, as well as staff (employee) appraisers or appraisers acting as independent contractors. This removes all doubt of the acceptability of such relationships which were questioned by many in the industry since HVCC was first announced. It will be interesting to see the reaction to this, as it raises serious questions about a conflict of interest in the transaction. How can you assure appraiser independence if the appraiser is being compensated by an entity that is wholly owned by the lender selling the loan to Fannie or Freddie? This seems to cut against the general intent of these rules.
4) Second appraisals should not be ordered on any transaction unless the lender has reason to believe that the original appraisal was flawed or tainted (reasons for which must specifically be noted in the file) OR the second appraisal is required by law or ordered as part of a standard appraisal review or QC process. If second appraisals are ordered for review/QC, lenders need to have a policy of selecting the “most reliable appraisal, rather than the appraisal that states the highest value”. This is a slightly more in-depth explanation of the prohibition on “value shopping” than appears in HVCC.
5) Lenders are now explicitly allowed to use appraisals transferred from another lender or lender’s AMC, including for transactions where a mortgage broker has originated the loan. Note that if a lender elects to do so they must assume complete responsibility for that report’s compliance with the appraiser independence requirements. This provision should come as a relief to mortgage brokers across the country who have long been fighting for the ability to transfer reports and save borrowers’ time and money.
6) Borrowers must continue to be provided with copies of appraisal reports “promptly upon completion at no additional cost…and in any event no less than three days prior to closing.” This 3 day requirement can be waived by the borrower in writing, so long as the waiver request is completed at least 3 days before closing. In practice, just as with the rescission waiver allowed in the Truth-in-Lending Act, don’t expect lenders to accept these appraisal report waivers either.
7) It should go without saying, but appraisers must continue to be State-licensed or certified by the State in which the subject property is located. Additionally, all of the prohibitions on coercion, influencing or attempting to influence the value or composition of an appraisal report remain in effect. They are too numerous to list here, but are fully detailed in the Fannie and Freddie releases.
A document with the full requirements can be found at: https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/air.pdf
If you read the above document, remember that the term “Seller” refers to the entity actually selling a loan to Fannie Mae or Freddie Mac, which is not always the entity funding that loan.
***The effective date for the sunset of HVCC and implementation of the new requirements is November 1, 2010 or when the Federal Reserve issues final regulations on the Dodd-Frank bill, whichever is earlier. HVCC remains in effect until that time.***