HW Focus: Property Valuation

/ a concentrated look at industry issues

property

valuation

inside:

HVCC

How it’s changed the industry

101

Appraisal vs BPO vs AVM

plus more

special edition of housingwire magazine / 2010

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contents

focus Volume 1, Issue 1

p r o p e rt y va l uat i o n

a property valuation primer Get schooled on all the terms and acronyms of the business and read what the experts are saying about the future of the valuation industry.

HVCC: A Long, Winding and Bumpy Road Proponents of the Home Valuation Code of Conduct claim it deters fraud and promotes appraisal accuracy. But even before its implementation, the code’s been criticized as ineffective at ensuring appraiser independence.

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12 The AMC Alternative

While independent appraisers and appraisal management companies duke it out over the HVCC, mortgage lenders and homebuilders are stuck in the middle.

data

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Reference

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Visualizing essential valuation info

Valuation Directory and the HVCC

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Contents

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Property Valuation

Appraisal limbo

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21

Contrary to popular belief, using an AMC isn’t the only way to ensure HVCC compliance. The number of software alternatives continues to grow as a new market is tapped.

1

p u b l i sh e r ’ s n o t e

Making sense of the valuation puzzle

I

n the realm of information, there is truth and there is spin. And perhaps one of the single most important aspects of “being HousingWire” is our commitment to separating truth from spin for our readers. In fact, anyone who has met members of our editorial team will tell you — we’re downright fanatical about it. It’s part of what makes us who we are.

editorial

Millions of readers have come to expect the unvarnished truth from our editors and writers—a charge we do not take lightly.

NEWS REPORTER Austin Kilgore

So when we were challenged to push the editorial envelope for 2010, we decided to head in a direction that allowed us to keep “being HousingWire,” yet also allowed us the freedom to mix things up with our readers a little bit more. You’re holding the result, called HW Focus.

Creative

A quarterly supplement to HousingWire magazine, HW Focus allows our editorial team to drill deep into issues of critical relevance to the housing and mortgage finance industries — to give our readers deep perspective directly from the professionals who call the trenches of the everexpansive mortgage industry their career.

Digital developer Ron Ferguson

This first HW Focus is centered, appropriately enough, on real estate valuations. If the market is going to sustain a recovery, after all, one of the most important aspects is determining a fair price for homes in the United States. And as you’ll see within the pages that follow, picking the method best suited for doing so requires a bit more than a point-and-click.

executive creative director Greg Lakloufi

Publisher’s Note

To help you make sense of the valuation puzzle, we’ve taken the liberty of listing information on key valuations providers we’re familiar with in the back of this special supplement — and you should know that we did not charge any firm to be listed there, because we want you to be able to see, without influence, what players are in the market.

I think you’ll find the perspectives strewn throughout this edition of HW Focus to be engaging and an interesting snapshot of an industry yet in flux.

Enjoy!

Paul Jackson, Publisher

PUBLISHER & editor in chief Paul Jackson ASSOCIATE PUBLISHER Richard Bitner EDITOR Jacob Gaffney

ART DIRECTOR Polly d’Avignon WEB producer Rizwan Javaid

designer Rosangel de Moreira

the ltv group

Brand Manager Kelly Yorek ADVERTISING Christi Lingard • 469.893.1492 clingard@theLTVgroup.com Lauren Border • 469.893.1500 lborder@ theLTVgroup.com SUBSCRIPTIONS & REPRINTS Christina Vick • 469.893.1493 christina.vick@housingwire.com

about HW Focus is published by The LTV Group, 2701 Dallas Parkway, Suite 200, Plano, TX 75093; 469.893.1497 The information contained within should not be construed as a recommendation for any course of action regarding legal, financial or accounting matters. All written materials are disseminated with the understanding that the publisher is not engaged in rendering legal advice or other professional services. The LTV Group does not guarantee the accuracy of information provided, and is not liable for any damages, losses, or other detriment that may result from the use of these materials.

focus

Property Valuation

volume 1, issue 1 april 2010

© 2010 by The LTV Group • All rights reserved

2

Appraisal

Which one will get you 3 feet from the pin?

BPO

AVM

Applying the right valuation requires experience and resources.

On the golf course, too much club or not enough are both costly. When it comes to valuing property, the same rules apply. A trusted partner can help you consistently select the right solution for each situation. From AVMs to BPOs, appraisals to hybrids and customized solutions, First American provides the right product every time.

Using customized solutions, best practices consulting and unmatched technology, we enable you to minimize cost and risk. Let us show you the experience and resource power of an industry leader.

Visit www.firstam.com/valuations or call 866.308.4713 today.

866.308.4713  www.firstam.com ©2010 The First American Corporation  NYSE:FAF

DYNAMIC

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Our data solutions offer the most complete real estate and loan-level performance data in the industry for the highest level of transparency available.

With LPS’ high-performance analytics tools you can determine current and future property values and trends, provide prepayment and default scores, and detect fraudulent mortgage activity for comprehensive portfolio management and due diligence.

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10 1

a valuations primer Without accurate valuations, how would anyone know what a fair price for a piece of land and any buildings on it would be worth?

How Do Property Valuations Work?

That need has been met by a multifaceted and elaborate valuation industry.

There are three ways to calculate a property’s value — the income, cost and comparable sales approaches. And there are just as many techniques

AppraisaL

pg 6

used to appraise what a property’s worth — appraisals, broker price opinions (BPO) and automated valuation models (AVM). Each have their strengths and weaknesses and play a vital role in the way the real estate industry determines value.

Clearly, the valuation industry is a complex and varied world of acronyms, technologies, regulations and professionals.

This section provides an overview of the valuation world. It also includes commentary from appraisal, BPO and AVM professionals with insight on their respective segments of the industry and where they believe the industry is going.

BPO

pg 8

AVM

pg 10

Th r e e W a y s t o C a l c u l a t e V a l u e

Cost Approach Property values can also be calculated by what it would cost to replace the property. Value is estimated by combining the value of the land and any structures located on it and the cost of replacing those structures, minus any depreciation.

This method is commonly used for insurance purposes and is most effective for new structures or special-use properties.

Valuation Primer

Calculating value with comparable sales means the valuation technique compares the subject property to other similar properties in the surrounding area to determine a property’s worth. Comparable sales data are compiled by Multiple Listing Services (MLS) and other pricing aggregators. This is the most commonly used to calculate residential property values. Comparable sales valuations assume a buyer will not pay more for a property than the cost of a comparable substitute property.

Property Valuation

The income approach calculates value by determining how much income the property can produce. Income can include rent or other profit derived from the structures on a property, taking into consideration deductions for operating and income collection expenses and vacancy rates.

Comparable Sales Approach

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Income Approach

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va l uat i o n s p r i m e r / a p p r a i s a l

appraisal In an appraisal, a certified appraiser provides a report that gives their opinion of what a willing buyer will pay a willing seller for a given property, when neither party is under pressure. Appraisers are governed by the Uniform Standard of Professional Appraisal Practice (USPAP) guidelines for ethical and professional conduct. An appraisal report is based on local market research, the collection and analysis of pertinent information, including the property’s features and amenities, location and condition. The report and value are also based on the appraiser’s knowledge, experience and professional judgment of the market where a property is located.

perspective / Marvin L. Wolverton

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Property Valuation

Valuation Primer

Appraisal

Statistics in appraisal: A brave new world

6

Forget those stereotypical perspectives on statistics. Today more than ever, statistical methods are making big inroads into the field of appraisals for legitimate reasons — to provide objective and unbiased perspectives on market trends and valuations.

Several factors are converging, which place knowledge of applied statistics at the forefront of effectively competing in the field of appraisal.

The Appraisal Qualifications Board of The Appraisal Foundation now includes a 15-hour module of mandatory qualifying education in statistics, modeling and finance for persons pursuing certification as a residential real property appraiser or general real property appraiser. The fourth edition of Appraising Residential Properties was revised extensively, including a new chapter devoted to statistics. The organization’s newest offering, “An Introduction to Statistics for Appraisers” (2009), is devoted entirely to statistics.

The book includes a comprehensive mathematics review, chapters dealing with using descriptive statistics to improve communication and understanding, and the basic elements of statistical inference.

Applied statistical inference methods are presented in three broad contexts: research design (probability, hypothesis testing, reliability, validity, and sampling), inferences based on normality (means, proportions, simple linear regression, and multiple linear regression), and inferential methods for small, non-normal data sets (non-parametric tests).

In addition to working through problems using underlying mathematics, the book’s example problems are augmented with “how to” instructions for solving them in Excel, SPSS and Minitab, which are popular and affordable software choices for appraisers. As such, “An Introduction to Statistics for Apprais-

ers” serves as a textbook and a reference book written specifically for appraisers. It represents a cutting-edge effort, providing far more than can be obtained in the minimum 15-hour education curriculum.

Because realty property offered for sale or rent is a self-selected sample rather than a random sample, appraisers should take care to ensure that the transaction data being analyzed is truly representative of the subject property’s competitive market. Experienced appraisers should be able to determine the extent, if any, of self-selection in a market that may preclude some data from inclusion in a given analysis or study.

Competent appraisers know that unfamiliarity with a market and an inability to assess the existence of self-selection bias within it require the assistance of someone who understands the market in order to credibly assess transaction data.

As such, the Appraisal Institute’s statistics book weds the statistical concepts of data representativeness and inference to USPAP and appraiser ethics, competency and credibility criteria.

Given the title, it is not surprising that the book is primarily targeted to real property appraisers. Others who would benefit from the book include tax assessors, review appraisers, users of automated valuation models, and real estate analysts.

Real estate brokers and salespersons could benefit from application of some of the techniques developed in the book as well by adaptation of some of the descriptive methods to listing and marketing presentations using Multiple Listing Service data. Given the advent of greater acceptance of inferential statistical methods in real property litigation, real estate litigators could use this book as a means to developing a better understanding of statistical expert testimony.

Marvin L. Wolverton, Ph.D., MAI, is a real property valuation theorist and consultant employed as a senior director in the national Dispute Analysis and Litigation Support practice at Cushman & Wakefield.

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v a l u a t i o n s p r i m e r / BPO

BPO A broker price opinion, or BPO, is a property valuation method that relies on the expertise of real estate agents and brokers to project the sales price of a given property. A financial institution will use BPO valuations for setting a value for home equity loans and lines of credit, to respond to a borrower’s request to remove private mortgage insurance, due diligence for financial institutions or other investors and as a way to gauge the accuracy of an appraisal.

But BPOs are most commonly used to value distressed assets. Typically, a BPO is the first step taken when a borrower defaults. BPOs can be used to determine value during the initial default, in short sales and foreclosures and for real estate-owned (REO) listings.

For a fee, real estate agents and brokers will create a two- to three-page BPO report that includes local and regional market information, neighborhood analysis and the values of nearby properties that compare to the subject property being priced.

BPOs are an effective tool because agents and brokers can compile a BPO report quickly, but many lenders and investors that use BPOs require multiple reports on any one given property. BPO companies operate very similar to appraisal management companies (AMCs).

perspective / Michael Ramer

Despite opposition, BPOs offer competent and quality valuations

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Property Valuation

Valuation Primer

BPO

Many appraisal organizations have histori-

8

cally opposed the use of BPOs. Since the downturn of the housing market and the subsequent increase in the utilization of BPOs, some appraisal groups have increased their resolve in opposing BPOs. Among other tactics, appraisal lobbying groups have approached lawmakers to enact restrictions on the use of BPOs. These groups will cite that sales agents and brokers lack the qualifications to give an accurate price opinion, that there is no formal training or education, and that there are no standards in the BPO industry.

Typically, lawmakers, as well as the general public, are only aware of appraisals as a valuation method, so it makes sense when appraisal lobbying groups present the notion that only appraisers should do valuation work. The players in the BPO industry have addressed these issues, and when presented with all the information, BPO restrictions would significantly hamper a bank/lender’s ability to get information on properties.

In today’s distressed housing environment, widespread BPO restrictions could be disastrous. Many of the players in the BPO industry feel strongly that there is a definite need for appraisals and that BPOs should never be used to replace appraisals. There are situations where appraisals are appropriate and other situations where BPOs are appropriate. Often, the combination of an appraisal and a BPO only provides more information to the decision maker. Logic dictates that more information is better, and it would be an injustice to limit information.

The top companies that provide BPOs established a coalition under the Real Estate Valuation Advocacy Association (REVAA) to oppose restrictions on BPOs and to advocate a wide variety of valuation tools.

To address the need for standards, many of the top BPO companies contributed by providing BPO subject matter experts to the BPO Standards Board (BSB) to establish and derive the BPO Standards and Guidelines (BPOSG), which are widely accepted and utilized in the BPO industry.

The wide acceptance and usage of BPOSG effectively addresses the need for standards within the BPO industry. In addition to formal BPO certification programs, many BPO companies provide additional training for their BPO vendors.

The combination of NABPOP certification and independent BPO companies’ BPO training programs, the level of efficiency and competency continues to increase in the BPO industry.

BPO companies also have well-established and effective quality control processes which ensure BPO compliance. Because NABPOP does not provide any valuations and is not competing with BPO/valuation companies, many BPO company QC departments collaborate with NABPOP to give feedback and improve the NABPOP BPO education and certification process.

The BPO industry is a highly collaborative community that is committed to providing quality and accuracy.

Michael Ramer is president of the National Association of Broker Price Opinion Professionals (NABPOP).

BPOs • APPRAISALS • RECONCILIATIONS • AVMs • TAX DATA

www.emortgagelogic.com

PROPERTY VALUATIONS NATIONWIDE Chris Perzel Director of Sales cperzel@emortgagelogic.com

8317 Whitley Road Fort Worth, TX 76148 817.788.6013

Quality checked through and through.

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va l uat i o n s p r i m e r / AV M

AVM Automated valuation models, or AVMs, use mathematical and statistical models to determine a property’s value. Depending on the AVM used, comparable sales data, historical trends in home prices and detailed information on a property’s characteristics are combined to derive the value. AVMs are used on distressed assets, as well as by lenders, investors and for fraud detection and marketing purposes.

As technology advances, AVM programs have developed to become more accurate. Proponents say AVM reports can be generated faster than appraisals or BPOs and save money and resources. Critics say current AVM software doesn’t take into account a property’s condition the way an on-site appraisal or BPO can and are less effective in rural areas compared to urban markets.

The latest emerging trend in AVM technology is so-called hybrid AVMs, which combine the ease and speed of a computer-generated AVM valuation with the professional opinion of an appraisal, who provides a review of the AVM report. With ever-increasing levels of foreclosures impacting home sales, the appraiser review of an AVM report can provide a measure of confidence that the valuation is accurate.

perspective / Joni Pierce

Hybrid AVMs: Dealing with the new normal

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Property Valuation

Valuation Primer

AVM

Depending on whether you’re a servicer or a distressed investor, this is either the worst or the best of times. Both groups would agree that conventional valuation techniques and products aren’t always the right tool for the kinds of problems that have become part of the new normal.

This is not to suggest that they aren’t using REO appraisals, broker price opinions (BPOs) and default AVMs. But they are also expanding their options with new hybrid solutions like appraiser-reviewed valuation opinions, reconciliation reports and even property listing verifications. Usually, these products rely on both experienced professionals and technology to make valuation decisions.

Hybrid models are designed to address these common problems:

10

Too much or conflicting information: Before a default manager can make an informed decision on which path to follow — modification or foreclosure — he or she needs to have a good sense of what the property is worth now. It is not at all uncommon, however, to be faced with conflicting valuations: the original appraisal and subsequent conflicting BPOs or AVMs. Which is right? Rather than order another appraisal or BPO, a reconciliation review is designed to break the tie and recommend which valuation should be used.

Too large a pool: An investor performing due diligence on a distressed portfolio of hundreds or even thousands of loans probably doesn’t have the luxury of ordering

A reconciliation review is designed to break the tie and recommend which valuation should be used.

— Joni Pierce

new appraisals or even updated BPOs on every loan.

AVMs provide some visibility into the current values, but historically they tend to overvalue distressed properties. One new option: appraiser-reviewed BPOs on the riskiest properties. This would refresh the valuation and give the investor the additional comfort level of having the broker’s views reviewed by an experienced appraiser.

Too many properties to track: REO managers are overwhelmed by the sheer number of properties that they have on the market and in their pipelines. How do they know which real estate agents are doing a good job, or even if they are doing their job at all? A property listing verification service tells REO managers what properties are listed, for how long and at what price, helping them manage their investors and vendors.

Joni Pierce is senior vice president at First American Valuation and Property Solutions.

perspective / Susan Allen

What’s hot in AVMs The advantages of AVMs have been apparent for years: They are fast, inexpensive and, for certain types of properties, they are very accurate. But they’re not right for every situation. That’s why developers are focusing on new testing techniques, designing specialized AVM products and applying AVM technology to solve difficult real-world challenges.

Here’s what’s hot at the moment: Testing for accuracy and the creation of the most effective “cascades”: First American’s new AVM testing methodology is a blind and continuous testing approach that overcomes testing problems such as dated performance, the imbalances between data-rich areas and markets with few or no hits, and it can even reduce the likelihood of an AVM having prior knowledge of a sales price. This new methodology is giving lenders the ability to demonstrate to regulators the steps they are taking to manage valuation quality.

More focused AVM products: Traditionally, AVMs have tended to overvalue real estate-owned (REO) properties. To compensate for

this, developers have come up with more default-sensitive AVMs, which can be used instead of or in tandem with broker price opinions. Distressed investors have been quick to see the value of default AVMs, and they are also gaining acceptance in loss mitigation departments at major servicers.

Micromarket price trends: Until recently, there were only two ways to measure real estate trends in local markets: median prices and housing price indexes. Now, thanks to AVM technology, there is a new and innovative way: ValueTrends. Our solution uses an AVM to assign a current market value to every condominium and single-family home in the nation by using our database of more than 90 million records. Unlike median prices, ValueTrends does not assume that the mix of properties selling over time is constant. Also, ValueTrends uses all properties that can be valued in a neighborhood, whereas index models use only paired sales. By using more data points, ValueTrends can represent smaller geographic areas with less volatility.

Susan Allen is vice president of strategic relations at First American CoreLogic.

Residential property valuation has never been more important than it is today.

Residential RealEstate Review is setting a new standard for timely and accurate valuations with a hands-on quality review.

When value is everything

ann.woodbury@rrreview.com | Contact Ann Woodbury at 801-293-2579

hvcc a long

winding

& bumpy

road

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Property Valuation

Features

HVCC

BY AUSTIN KILGORE

12

T

he Home Valuation Code of Conduct (HVCC) is the result of a joint agreement among Fannie Mae, Freddie Mac, the Federal Housing Finance Agency (FHFA) and New York State Attorney General Andrew Cuomo designed to enhance the independence and accuracy of appraisals to protect homebuyers, mortgage investors and the housing market.

Proponents claim the code helps appraisers do their job without interference from loan officers whose commission-based income is dependent upon completed mortgage deals. More accurate appraisals will lead to less fraud and a decline in predatory lending practices, they claim.

But even before its May 2009 implementation, the HVCC was met with extreme resistance from critics

who claim that the code is ineffective at doing what it’s supposed to do — ensure appraiser independence.

The original agreement for the code came after Cuomo threatened to sue the government-sponsored enterprises (GSEs) over allegedly fraudulent appraisals. The agreement to create the HVCC placated Cuomo, but sparked outrage from federal regulators who said they were not consulted on the plan.

A full year before the HVCC went into effect, Republican senators considered proposing legislation that would nullify the code by requiring that appraisal rules be set federally, rather than on the state level.

By December 2008, the complaints had grown so loud that days before the code was set to take effect at the start of 2009, the FHFA released a revised version

What’s done in New York is not necessarily what needs to be done in Mississippi.

The real estate markets are totally different.

NEXT: In their own words, industry insiders make the case for and against the HVCC.

Features

“While I am supportive of ensuring accurate appraisals, I have repeatedly expressed concern that the HVCC has potential to increase costs to consumers, significantly hinder a consumer’s ability to obtain legitimate and reliable appraisals, and adversely impact small-business professionals who work in the very neighborhoods where these consumers are looking to purchase homes,” Miller said in a statement released by his office.

“In fact, since the implementation of the HVCC on May 1,” Miller added, “there are numerous examples of higher costs for appraisals, poor service, the inability to use one appraisal for more than one lender, questionable quality of appraisals, and the inability to make corrections to inaccurate information on an appraisal report.”

The Miller amendment calls on the CFPA to revamp appraisal independence guidelines and take over supervision of appraisal quality. The HVCC would become ineffective on the day the CFPA completes a rule-making process to establish standard codes for appraisal independence. The Senate has since taken up the CFPA legislation, despite industry lobbying efforts to weaken or eliminate many of its provisions.

In December, another bill that would repeal the HVCC passed the House of Representatives. HR-4173, or the Wall Street Reform and Consumer Protection Act of 2009, would eliminate the HVCC. The bill has stalled, however, as the Senate continues its deliberations on comprehensive financial regulatory reform.

As efforts to repeal the HVCC continue to gain momentum in Congress, proponents of the regulation have argued that getting rid of the HVCC would lead to the same damaging business practices that puts undue pressure on property appraisers. But even if the HVCC is eventually repealed, the AMC industry believes it has set a new standard for appraisals and lenders, especially those that continue to hold loans on their balance sheets, will continue to look to AMCs as a means to provide independent and accurate appraisals.

HVCC

— Rep. Travis Childers (D-Miss.)

Property Valuation

focus

of the code that allowed lenders to use appraisals performed by affiliated appraisal management firms and in-house appraisers in certain circumstances.

But that change was also met with harsh criticism, particularly from independent appraisers, who said the HVCC will effectively force them to work for appraisal management companies (AMCs).

AMCs existed before the HVCC, but in the year since the HVCC was implemented, the industry has grown significantly. Independent appraisers who were used to working directly with lenders said they were now forced to work for AMCs for less money.

Many lenders have turned to AMCs to facilitate compliant appraisals. But lenders and brokers argue that AMC-hired appraisers are often paid less because the firms take a cut of the appraiser fee.

Other complaints include allegations that AMCs use out-of-market appraisers who aren’t qualified to value homes in specific markets and that appraisers travel too far for work or use inaccurate comparable sales to conduct appraisers.

The AMC industry contends that it provides lenders with objective appraisals. It claims that AMCs use licensed and certified local appraisers who travel on average 13 miles or less to assignments.

AMCs say they have systems in place to challenge an appraisal in case incorrect or incomplete comparable sales are used. In addition, AMCs argue that appraisal quality and appraiser objectivity have improved since the HVCC was implemented.

After the amended HVCC was released, the deadline for implementation was pushed back to May 2009.

But as late as April 2009, many lenders had not taken the necessary steps to implement the necessary technology for HVCC compliance.

Despite the confusion and the opposition, HVCC went into effect May 1, 2009. But that didn’t stop critics. In June, real estate industry group Think Big Work Small had gathered more than 35,000 signatures from individuals calling for the HVCC’s repeal. In addition, Rep. Travis Childers (D-Miss.), and Rep. Gary Miller (RCalif.) introduced legislation into the House Financial Services Committee to impose an 18-month moratorium on the code.

“This legislation is really for the industry to take a step back to see what needs to be done on a national level,” Ben Lincoln, legislative director at Childers’ Washington, D.C., office told HousingWire. “What’s done in New York is not necessarily what needs to be done in Mississippi. The real estate markets are totally different.”

That effort was ultimately unsuccessful, but in October, Miller proposed an amendment to “sunset” the HVCC into the legislation that would create the Consumer Financial Protection Agency (CFPA).

13

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LRES, the company you’ll love doing business with.

765 The City Drive South • Suite 300 • Orange, CA 92868 Toll Free: 800.531.LRES (5737) • www.lrescorp.com

Appraisal Institute’s

Leslie Sellers, MAI, SRA, is president of the Appraisal Institute, the nation’s largest organization of real estate appraisers with more than 25,000 members worldwide.

Features

legislation pending in the Senate (HR-4173) that provides for the oversight and regulation of AMCs, establishes consumer disclosure requirements for lenders relating to the appraisal process, and enhances existing appraiser oversight and enforcement mechanisms.

We also urge state legislatures to adopt the model bill we have developed that establishes state registration requirements for AMCs. We applaud a recent revision to Freddie Mac’s lending guidelines to emphasize the use of qualified appraisers affiliated with professional organizations such as the Appraisal Institute. We further congratulate the Federal Housing Administration for correcting its previous policy relating to AMCs to require FHA appraisers be paid “customary and reasonable” fees.

Lastly, we offer a long-term solution regarding mortgage originator involvement in the appraisal process. Over the past year, Congress has enacted the SAFE Act (which requires licensing for mortgage originators), states have enacted appraisal independence requirements for mortgage originators, and the Federal Reserve has enacted new prohibitions against appraiser coercion by mortgage lenders and mortgage brokers, backed by the Truth in Lending Act. If aggressively overseen and enforced, these provisions, coupled with applying the appraiser independence safeguards found in the HVCC, provide meaningful oversight and enforcement tools that did not exist at the time the HVCC was implemented. We believe aggressive oversight and enforcement of mortgage originators of these provisions provide a level of assurance to grant mortgage originators the privilege of managing components of appraisal management.

HVCC

LESLIE SELLERS

Property Valuation

As the nation’s largest organization of real estate appraisers, the Appraisal Institute has long advocated for an independent appraisal process, and we continue to support the underlying intent of the Home Valuation Code of Conduct. But the HVCC’s unintended consequences need to be addressed.

Prior to the HVCC, appraisers faced undue influence from parties that ignored sound risk-mitigation techniques in favor of making the quickest and biggest profit.

Since the HVCC’s implementation in May 2009, new concerns have emerged, including the precipitous rise in the number of unregulated appraisal management companies and a disruption in the valuable relationships between highly competent appraisers and reputable and meaningfully regulated mortgage professionals at the local level.

In addition, the HVCC has created competitive disadvantages for small, independent appraisers. Aggregation of appraisal orders by lenders and AMCs has reduced the number of potential appraiser clients from dozens to merely a handful in most cases, virtually overnight.

Today, according to industry estimates, more than half of the residential appraisal market is controlled by a mere 40 national firms. It is essential for the longterm health of the lending industry that highly competent professionals not be driven from the appraisal profession, particularly in today’s complex market.

The Appraisal Institute strongly believes that appraiser independence policies as promoted through the HVCC need to remain in place; however, our organization also believes enhancements can be made to the HVCC to benefit the lending industry, appraisers and consumers.

To correct the HVCC’s shortcomings and enhance regulatory reform, the Appraisal Institute supports

Perspective

focus

HVCC’s unintended consequences

15

Perspective TAVMA’s

Jeff schurman

Appraiser independence protects lenders and homebuyers

For more than 20 years, dating back to the postmortems of the S&L crisis, Congress and regulators tried without success to create a mechanism that would assure appraiser independence. Last May, to the chagrin of many parts of the mortgage and real estate industry, the first truly effective solution, Home Valuation Code of Conduct (HVCC), took effect.

Judging from the uproar in the media and the spate of federal and state legislative proposals that it has spawned, it would be easy to believe that HVCC is somehow detrimental to the mortgage industry. In fact, the opposite is true: The central tenet of the new code, appraiser independence, protects lenders and investors from collateral risk and consumers from overpaying for their homes.

When mortgage brokers and commissioned loan officers were allowed to pick their favorite appraisers, there was a significant potential for a conflict of interest.

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— Jeff Schurman Unfortunately, this message has been drowned out by critics of the code: mortgage brokers, appraisers who used to work exclusively with brokers and other parts of the real estate and homebuilding sectors.

This group has waged a concerted campaign against the code and appraisal management companies (AMCs). Their goal: turn back the clock to the good old days and the good old ways, conveniently forgetting that these practices led first to the S&L debacle and more recently in the real estate run-up and the first national housing price crash since the Great Depression.

But what about the most affected party: the lenders and investors who rely on appraisals to make prudent lending decision? Do they see a benefit? The Federal Housing Finance Administration (FHFA), which oversees Fannie Mae and Freddie Mac, clearly does. Last summer it took the unusual step of issuing a statement on its views: “The code insulates appraisers from pressures that led to higher or lower appraisals and should now lead

to more accurate valuations,” the statement said. “This is in everyone’s interest.” At major industry conferences this fall, collateral risk experts from both government-sponsored enterprises (GSEs) said that the code was working. One Freddie Mac executive noted that they have seen a 15 percent improvement in appraisal quality since HVCC. In February, The Federal Housing Administration (FHA), which wasn’t party to the original code and was initially critical of parts of it, decided to ban mortgage brokers from selecting appraisers to foster greater independence and unbiased valuations.

This is not to say that HVCC is perfect, and that certain parties, like many hard-working, honest mortgage brokers, have been affected by it. But it has, at least for the time being, solved a vexing industry problem.

When mortgage brokers and commissioned loan officers were allowed to pick their favorite appraisers, there was a significant potential for a conflict of interest.

Under the old system, an appraiser knew what was at stake with each order: Come back with an accurate opinion that is lower than expected by the broker, and you risked losing a future stream of business.

Since the beginning of the AMC industry, more than 30 years ago, reputable companies provided a firewall between appraisers and loan officers. The advent of HVCC further validated this model and shifted more business to TAVMA members and other AMCs. But it has also made our industry a target. AMCs have been vilified in the press and threatened by new federal and state regulations.

To read the popular press and blogs, AMCs are middlemen, who send the cheapest, inexperienced appraisers to value properties in far-away markets. In fact, 60 percent of all independent residential appraisers work with AMCs. The average AMC appraiser travels 13 miles or less to their assignment and are chosen based on local real estate expertise — not personal connections to the interested parties.

The mortgage and real estate industries won’t rest until confidence in values and processes has been restored. A system that promotes accurate, high-quality, objective appraisals is a vital part of the solution.

Jeff Schurman, CAE, is executive director of the Title/Appraisal Vendor Management Association (TAVMA).

of Conduct (HVCC) sets off emotions and sparks endless, heated debates. What started out as an agreement among the New York State Attorney General’s Office, Freddie Mac, Fannie Mae and the Federal Housing Finance Agency has resulted in one of the most misguided regulations in decades. At its core, the HVCC was supposed to provide measures that would ensure the independence of appraisers while promoting transparency in the appraisal process. Yet key sections of the original code were removed prior to its implementation last year.

Never before have appraisers lost so much independence. There now exists greater scrutiny of appraisals, greater demand for accuracy and greater lender requirements. Appraisers are paid less per appraisal than they earned 20 years ago. These undercut fees are actually having the reverse effect of what the HVCC was supposed to correct. Today there is greater pressure on appraisers as they struggle to balance a business stripped of market revenue and deliver an appraisal that meets investors’ expectations.

The demise of the independent appraiser cannot be blamed solely on the HVCC. The failing economy, bank and lending institution closures and record foreclosures have greatly impacted the amount of appraisal work available. What is indisputable is that many experienced appraisers have simply closed shop, leaving the profession to a new generation of undertrained

appraisers that (to a great extent) do not grasp the concept of a declining market.

Yet not all is doom and gloom. The FHA has refuted the code and instead is relying on its own set of regulations that make more sense. There are some appraisal management companies and lending institutions that realize appraisal fees need to be at a point that will allow the appraiser the independence to provide a professional, unbiased opinion of value.

Axios Valuation Solutions is committed to a partnership with appraisers that promotes transparency, fairness and elevates the profession by providing solid review feedback to appraisers.

While the HVCC is set to sunset in November 2010, it’s clear that its power is ingrained in the lending landscape and is unlikely to change the way lending is done today.

Unless there are new regulations passed that will address all the issues of the appraisal profession, including lender pressure, lender-owned AMCs and real transparency, then no progress will be made. Several bills have been introduced, but all fall short of fixing the ailing profession. AMCs such as Axios can and will lead the way by partnering with appraisers with experience and make the profession gain the public trust it so deserves.

George Heredia is vice president and chief appraiser of Axios Valuation Solutions.

HVCC

The very mention of the Home Valuation Code

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George heredia

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Appraiser independence

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Perspective

cindi harris

State AMC regulations are a mixed bag

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HVCC

In recent months, a number of states have adopted or proposed state regulations for Appraisal Management Companies (AMCs). Each state has its own approach to these regulations which include varying registration fees, surety bonds, fingerprints, background analysis and other compliance standards such as educational requirements.

The idea of regulating AMCs is not in itself distressing; however, the lack of consistency and the derived benefits of such efforts have yet to be determined.

The regulations either enacted or proposed thus far do not promote consistency and do little to provide true reform.

There are good AMCs and bad AMCs, and appraisers are beginning to differentiate between them.

Overall, AMCs have a tarnished reputation, and this can be attributed to the past behaviors of those who have not valued their appraisers. There are AMCs today that pay a high percentage to the appraiser and still hold quality as the intrinsic feature to the final product. Conversely, there are still players in the space that do not adequately compensate appraisers or appreciate the need for credible and reliable valuations.

The differentiation between the good and bad AMCs, if given time, will prove to elevate the good AMCs and increase their market share.

The ugly factor in this new regulatory environment is that forcing the good AMCs to comply with 50

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different sets of regulations, fees, bond requirements and compliance standards may cause them to retract from certain markets, stop doing business or be forced to increase margins to cover these costs. The appraisers who support these regulations could ultimately be negatively impacted by its effects. Lenders will also have to contend with monitoring the AMCs or their wholly owned subsidiaries to ensure their compliance in all of the states. In addition to all of the other new regulations (i.e., RESPA), the AMC requirements will prove arduous for the lenders.

State regulations for AMCs could be beneficial if they were consistent, affordable and actually promoted advocacy for the AMCs that are producing quality product with fair compensation to the appraisers. A good AMC can contribute significantly to the lending industry and create the competition required to foster the continued growth of companies espousing the competencies needed for economic security within the mortgage markets. It will be ugly if the good AMCs suffer as a result of these regulations.

If the end goal is to promote credible, reliable and quality valuations products for lending decisions, then why are they potentially forcing out those who promote those very ideals?

Cindi Harris is chief operating officer of Quality Valuation Services.

Tom O’Grady is CEO of Pro Teck Valuation Services.

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The Home Valuation Code of Conduct (HVCC) was implemented to restore confidence in the collateral value underlying a mortgage. The thought was that tighter valuations would give investors confidence to re-enter the mortgage backed securities market.

Confidence drives investment.

Like many things, HVCC has its share of good and bad points.

HVCC promotes appraiser independence by acting as a “firewall” between brokers, Realtors and commissioned loan staff.

Freddie Mac has even commented on an increase in appraisal quality since HVCC was implemented.

On the negative, it hasn’t been fully implemented (the Independent Valuation Protection Institute, a place for appraisers to report issues, has not been set up), and many good appraisers whose business model relied on mortgage broker relationships were disproportionately impacted.

So if confidence drives investment, then HVCC has been good for the industry. And if confidence is needed to get the economy moving, then there is an issue that could have a much greater impact than HVCC in 2010 — the growing number of disparate state AMC regulation and registration initiatives.

Imagine a United States where driving laws were different in every state. What if in half the states you drive on the right side, the other half the left? How many more accidents would there be, how many fewer cars would be purchased? What would happen to insurance rates, roads, the automobile industry?

AMC regulation is a good thing for the industry, and Pro Teck endorses the Title/Appraisal Vendor Management Association’s (TAVMA) Standards of Good Practice in Appraisal Management.

Implemented and enforced consistently on the state and/or federal level would instill confidence. But state initiatives like those being proposed in New Mexico and Utah are like driving on the left side of the road.

Pro Teck’s job is to give its customers the best real estate valuation information possible so they can make smart investment decisions.

We believe it is the role of government (state and/or federal) to protect its citizens with laws that regulate industry while promoting commerce. States individually passing laws that materially change the industry will hurt commerce and negatively impact investor confidence.

We all want to get the economy moving again. The Federal Reserve has said it plans to stop buying mortgage-backed securities at the end of March. We need tight valuations provided by trained professionals so that MBS investors can feel confident, no matter if the underlying asset is in New Mexico, New Hampshire or North Carolina.

Consistency drives confidence, confidence drives investment.

HVCC

HVCC: Good? Bad? Why?

Property Valuation

The Department of Housing and Urban Development (HUD) postponed implementation of new rules meant to promote objectivity for appraisers and minimize interference from lenders of Federal Housing Administration-backed mortgages.

The Jan. 1, 2010, implementation of Mortgagee Letter (ML) 200928 was postponed until Feb. 15, 2010. The new FHA regulations are similar to those implemented by the government-sponsored enterprises (GSEs) to ensure appraiser independence with the Home Valuation Code of Conduct (HVCC).

Prior to the new rule, FHAapproved lenders could not accept appraisal reports selected, retained or compensated, in any manner by real estate agents. According to ML 2009-28, FHA-approved lenders will be prohibited from accepting appraisals prepared by FHA Roster appraisers who are selected, retained or compensated in any manner by a mortgage broker or any member of a lender’s staff who is compensated on a commission basis tied to the successful completion of a loan.

The second part of ML 200928 makes lenders responsible for ensuring the appraiser who actually conducted the appraisal is correctly identified in FHA Connection, the Web site lenders and appraisers use to facilitate transactions with the FHA. The extension provided FHA and lenders additional time to adjust systems to accommodate the changes and additional guidance about changes to FHA Connections will come in a later ML, the Department of Housing and Urban Development said.

— AK

tom o’grady

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FHA HVCC is implemented, despite delays

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Lenders, builders stuck in the middle of the hvcc debate

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Appraisal Limbo

By Aus t i n K ilg o re

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Appraisal Limbo

Even before the HVCC took effect, industry groups representing lenders and the building industry voiced their opposition to the code. The Mortgage Bankers Association, in a 2008 letter to executives at the government-sponsored enterprises (GSEs) and the director of the Federal Housing Finance Agency’s (FHFA) precursor, the Office of Federal Housing Enterprise Oversight, said it recognizes that appraisers are subject to pressure by borrowers, real estate agents, mortgage brokers and commissioned employees of lenders, but said the code “poses serious procedural and substantive concerns that present safety and soundness risks to the GSEs and financial institutions generally.”

If I had an appraiser that was giving me bad appraisals, I’m not going to call on him anymore.

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— George Weaver, senior loan officer

The MBA argued that the process of creating the code did not seek enough input from the greater mortgage industry. From its first protests, the MBA has argued that the HVCC’s regulations are ambiguous and unclear. In an October 2009 hearing before the House Financial Services Subcommittee on Housing and Community Opportunity, MBA chairman David Kittle reiterated the concern.

“MBA members continue to express concern regarding the ambiguity of various terms of the GSE Home Valuation Code of Conduct,” Kittle said in prepared testimony.

Another mortgage group, the National Association of Mortgage Brokers (NAMB), also protested the HVCC. When the revised HVCC came out at the end of 2008, the group argued that by giving appraisal management companies (AMCs) more control in the appraisal process, brokers are less effective at managing mortgage transactions.

“This agreement will increase costs to consumers and remove thousands of small-business competitors from the marketplace,” NAMB president Marc Savitt said in a statement. “This will create a severe disadvantage to small-business mortgage brokers and prevent them from engaging competitively in the mortgage marketplace.”

“The solution to appraiser fraud is to hold responsible those that commit the fraudulent acts: appraisers,” Savitt added. “Regulators have failed to reprimand appraisers committing similar acts to those committed during the savings and loan crisis, and instead held small-business mortgage brokers accountable.”

One such small broker is George Weaver, a senior mortgage loan officer at Premier Holding, in Shawnee, Kansas, a suburb of Kansas City.

Weaver said borrowers are paying more for appraisals. “You’ve got a whole other layer of people that want to make a profit out of that process. I’m not sure that appraisers are even getting what they got before,” he said.

“A lot of appraisers worked in small offices or solo, and in the past, a typical appraisal would be $350,” he continued. “Now that they have to attach themselves to a management companies to get work, they’re only getting $225 to $250, even though the appraisal management company is charging $450 to $460. The appraiser is getting less and the AMC is charging more.”

Premier Holding is a small correspondent lending operation with a three-person staff that specializes in originating conventional refinance and purchase mortgages. Weaver said the company doesn’t do a lot of advertising and relies on word-of-mouth referrals from satisfied customers to earn new business.

Before the code was in place, a potential borrower could inquire about a refinance and Weaver would call an appraiser to get a preliminary estimate of what the house would be valued at.

Armed with that information, Weaver could consult with his client and make a recommendation on whether it was a good idea to refinance. Now, because of the HVCC’s regulations, Weaver said he can’t provide accurate advice to his clients.

Making matters worse is the uncertainty that comes when a foreclosure impacts prices in a neighborhood, Weaver said, and he’s had many potential refinance customers get nervous and decide to wait to refinance.

Before the HVCC, Weaver said the three-man correspondent lending operation he works at never used AMCs. “We had probably had three different appraisers we used on a consistent basis that we had good working relationships with,” he said.

While proponents of the HVCC would argue that appraiser-originator relationships like that led to bad appraisals during the housing boom, Weaver disagrees.

“If I had an appraiser that was giving me bad appraisals, I’m not going to call on him anymore. If they’re doing my customer a disservice, ultimately I’m not going to get paid,” he said.

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While independent appraisers and appraisal management companies duke it out over the Home Valuation Code of Conduct (HVCC), mortgage lenders and homebuilders are stuck in the middle.

P e r s p e ct i v e / Gr i f f s tr a w

Getting the most from AMCs, with or without HVCC Another way to get the most from the AMC is to pick one that offers tracking and performance metrics as part of their value-added service. These metrics, accessed online in a Web-based environment, give lenders the means to truly understand their appraisal effort — the accuracy of the reports and the professionalism of the appraisers being utilized. At the same time, they can set a variety of ordering parameters for things like appraiser proximity to subject properties, maximum adjustments allowed for comparables, and other specifics.

Features like these help appraisal efforts maintain high standards, with complete transparency and statistics that are otherwise difficult to track. In addition, the best AMCs will have extensive national approved appraiser lists that lenders can use in conjunction with or instead of their own panels, as desired.

All AMCs are not created equally. By picking the right appraisal management partner, lenders can avoid the difficulties that have plagued the HVCC, comply fully with the new FHA appraiser independence rules, enjoy documented and measurable improvements in appraisal accuracy, and save time and resources in the process. Making it happen is simply a matter of doing a little homework and picking the right vendor partner.

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Appraisal Limbo

Griff Straw, CMB, is president of Solidifi U.S., a leading technology-enabled appraisal management company.

Griff has more than 30 years in the mortgage business and is a member of the MBA’s master faculty.

Property Valuation

the fact remains that there is great value to be gained by lenders in using appraisal management companies (AMCs). As with any product or service, the key is in picking the right vendor by performing a little due diligence. There are tremendous differences among AMCs, largely in their use of technology and how well it is deployed.

The main complaints from appraisers about AMCs revolve around having to split fees with them, and this is completely understandable.

When accepting orders from many AMCs, appraisers often have to settle for as little as half of the amount being charged consumers for the appraisal, with the rest going to the AMC to cover administrative overhead and profit. Appraisers feel taken advantage of in this scenario, reasoning that if they don’t take these reduced fees, they risk not getting enough work to support themselves.

I strongly believe that if you pay full fees to appraisers, you not only get a more qualified professional to do your work, you end up with a measurably better valuation. Lenders should look for AMCs that pay the full fees that bring better results.

Importantly, this can be accomplished without charging more to the consumer because the more sophisticated AMCs use their technology to perform the repetitive administrative tasks others hire people to do. Their AMC fees are a fraction of what the old school charges, so appraisers can make a fair and reasonable fee for doing great work.

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Whether or not Congress overturns the HVCC,

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Increased appraiser independence is here to stay

Lender Solutions to Appraiser Independence Most lenders have already deployed independence solutions including 1) staffing and managing their own in-house process, 2) using an appraisal management company or 3) deploying auto-assignment technology that has proliferated the market as of late.

Many lenders are currently rethinking or testing amongst these alternatives to ensure they are deriving the best quality, service and compliance.

Appraisal Limbo

Steve Haslam is CEO of StreetLinks National Appraisal Services.

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Appraiser Independence and Loan Brokers Brokers are outraged over their removal from any material aspect of the appraiser selection and management process. They feel that blame for the woes in the mortgage-market has been legislated at them. They say it was the lenders’ responsibility to quality control and approve loans.

With regards to exotic loan products, brokers didn’t create them — they originated the products the capital markets made available.

Loan brokers will likely remain prohibited from involvement in the appraisal process and remain subject to each lender’s appraisal compliance solution on 90 percent or more of their loans now that FHA is included. Since lenders bear all the material risk and liability of loan defaults and repurchases, they will likely want to maintain absolute control over that risk in the current economic and political environment.

Is there anything the brokers can do? The broker is the customer of the lender. As the customer, brokers should carefully evaluate each lender’s wholesale appraisal management solution. Since the service and quality of the appraisal weigh heavily on the loan funding, brokers will be motivated to only work with lenders who offer the best appraisal fulfillment solutions.

Property Valuation

tum toward “sunsetting” the HVCC. No matter the outcome, appraiser independence, as defined by the HVCC — the isolation of loan production staff and management from the identification, selection and substantive communication with appraisers — is likely here to stay.

Why? Lenders and investors are interested in top dollar for their loans as well as loan performance for the sake of their holdings, stock value, company health and industry perception. Many lenders have indicated that the HVCC procedures they have implemented will likely remain mandated across their wholesale, correspondent and retail channels.

The FHA adopted similar independence policies on Feb. 15, 2010. While slightly different than the HVCC, the isolation of loan production staff and management from any material involvement in the appraisal process was incorporated.

Also, the majority of states have adopted their own appraiser-independence mandates that espouse similar arms-length requirements as the HVCC and FHA.

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Appraisal Limbo [ continued from page 22 ]

Now, virtually all the mortgages he originates use AMC appraisals. He estimates 90 percent of the mortgages Premier originates go to one AMC, but, “our use of AMCs is strictly a function of whatever lender we’re getting in bed with, on a loan, is going to govern what AMC we use,” Weaver said.

You don’t have to go through a third party to get a CPA to do an audit of your company.

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— George Weaver

The company’s had mixed results with the AMCs. “We’ve had more trouble with the AMCs on investment properties, but on owner-occupied stuff, I would say most of those have gone pretty well,” Weaver said.

“I don’t know if that’s a function of the appraiser we got on a specific deal or an actual trend.”

Weaver is a proponent of repealing the HVCC and said more enforcement should be put on bad appraisals.

“The original problem was that there were bad appraisals. So if there were bad appraisals, find the bad appraisers who did the bad appraisals and remove their licenses,” he said. “Don’t punish everybody else in the system because of however many bad ones you had. You don’t throw out the whole barrel of apples just because there’s one bad apple in there.”

Weaver compares the appraisal industry to accounting and the relationship between certified public accountants and companies that hire them for audits.

“You don’t have to go through a third party to get a CPA to do an audit of your company,” Weaver said.

“The company pays the CPA for the audit, and there’s a relationship that exists there, but if the CPA sees something that’s not going right at the company, he’s going to write it up. Why should appraisals be any different?”

“That’s why they’re licensed,” he added. “If they don’t perform ethically, they lose their license and are out of business.”

Builders are equally upset about the HVCC. The National Association of Home Builders (NAHB) went so far as to host a summit that focused on residential real

estate appraisals, where builders called for sweeping reform of the code.

The glut of foreclosure resales on the market has impacted new home sales in two ways. The overwhelming inventory has created increase competition for buyers and prices of distressed properties are bringing down property and house values, which ultimately impact new construction.

The NAHB claims some appraisers of foreclosed or other distressed properties compare values to new homes without proper adjustments, ultimately impacting the quality of appraisals needed to originate mortgages for new home purchases. The group also contends that appraisers are working out of the markets where they are qualified, pulling down home values and impacting sales where inaccurate appraisals come in below the contract sales price.

NAHB’s claims the HVCC slows the appraisal process by impeding the “ability to obtain appraisals of the quality required in today’s distressed markets,” Some appraisers are working in areas outside of their geographic familiarity, the group said.

“Appraisers generally are only required to inspect the exterior of a property that is being used as a comparable because they are normally unable to enter these homes and examine their interiors,” NAHB chairman Joe Robson, a home builder from Tulsa, Oklahoma, said after the summit. “But all too often, properties that have been subject to foreclosure or distress sales have issues related to deferred maintenance or internal damage that an external inspection simply cannot detect. You can’t compare these properties to new homes that are in market-ready condition.”

In addition to HVCC reform, NAHB has called for the adoption and enforcement of regulations governing the use of distressed and foreclosed properties in the appraisal process, that would allow appraisers to form “realistic” valuations based on comparable sales.

The HVCC has significantly changed the way lenders and homebuilders operate in their respective industries. Some of the initial complaints could be merely be the result of an industry resistant to change, but with the HVCC’s one-year anniversary nearing, the code continues to provide challenges for the industry.

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The Home Valuation Code of Conduct has been a boom

w a n t m o r e ? / h w F o c u s r e t u r n s i n j u ly e x pl o r i n g a ll t h i n g s t e c h

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While appraisal management companies (AMCs) are seen as one option for lenders to be HVCC-compliant, a number of software products are also on the market as an alternative method to attain compliance.

“The key point is keeping a firewall between the appraisers and the lending community,” said Vladimir Bien-Aime, CEO of appraisal software developer Global DMS. “Loan officers need a portal to submit appraisal requests and we created an automated system where those requests are directed to the appropriate appraiser.”

Another appraisal software developer, SharperLending, launched its offering, Appraisal Firewall, in May 2009.

In developing the software, SharperLending conducted an analysis of the HVCC to ensure their product provided compliance, but also took advantage of the nuances of the regulations. The software option also allows lenders to continue their long-standing relationships with appraisers, while maintaining compliance.

David Chiappe, SharperLending’s director of business development, said the HVCC essentially split the lending industry into two camps — one group that has adopted to manual processes for appraisals by using AMCs and a second group that turned to technology.

But Chiappe said the tide is turning and nearly one year into the HVCC era, lenders are looking for alternatives to AMCs. “What we’re finding now is that there is more demand for lenders that are looking to manage their own appraisal processes in-house, utilizing technology to become compliant with HVCC,” he said.

While order appraisals through AMCs can be used to maintain HVCC compliance, Chiappe said lenders still might be out of compliance.

“If you have a loan officer place an appraisal order with an AMC, that is no different than a loan officer placing an order with an appraiser,” he said. “You’re not allowed to do that under HVCC.” Lenders’ issues with AMCs range from increased cost of appraisals and slow turnaround times to poor appraisal quality and a desire to work with the local appraisers with whom they have established relationships. “Our approach puts the lender in control of their lenders in an HVCC-compliant manner with all the logging and reporting necessary to make sure there’s a good audit trail,” Chiappe said.

Appraisal Firewall is a Web-based interface that works like a social networking site. Appraisers and lenders create profiles. Lenders also create an automatic rotation of appraisers as well as an AMC as a secondary choice when appraisals are needed in areas where the lender doesn’t have established relationships.

When a loan officer files an appraisal order, it is routed to a rotation manager, who either manually assigns the appraisal or has an automated system for directing the order to the appropriate appraiser. The system keeps a log of all communication between lender and appraiser, which can be used to demonstrate HVCC compliance if a loan file is audited.

But ultimately, HVCC compliance is the sole responsibility of the lender, said Chiappe’s colleague and SharperLending president Dave Black.

The AMC Alternative

for business at appraisal management companies (AMCs), but contrary to popular belief, lenders are not required to use AMCs. There are other alternatives, and software firms have stepped in to provide solutions to the compliance issues the code created.

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“A lot of AMCs are guaranteeing compliance, but the obligation for being HVCC-compliant solely stands on the lender’s shoulders, and the AMC really can’t guarantee anything,” Black said. “The lender has buyback obligations in case they are out of line on any aspect of a loan, including HVCC compliance.”

“All they get is a document that says this is HVCCcompliant, which from our perspective is little more than marketing,” Chiappe added.

Software companies aren’t anti-AMC, executives explain. Many tech firms even have AMCs as clients. But they’d rather see the companies return to the business model the firms operated under before HVCC. “We’ve tried taking an AMC, whose job it is to find appraisers in locations where their lenders don’t have relationships, and tried to make them HVCC compliant

people out of the same model,” Black said. “The technology model allows for costs to be way down over the manual model the AMCs apply and is much more favorable for the appraisers.”

The argument to repeal the HVCC centers around abuses of AMCs. But there’s nothing that says lenders have to use AMCs or that appraisers have to take $250, Chiappe added. “With or without HVCC, it is not in anybody’s benefit to allow a broker or lender to influence the valuation of a property that somebody’s going to hold as collateral.”

Bien-Aime agrees. “Before HVCC, let’s face it, the door was wide open to loans containing inflated appraised values. In order to avoid the problems of the past decade, we need to do everything we can to protect the integrity of collateral valuations,” he said.

p e r s p e c t i v e / D a v e B i gg e r s

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The AMC Alternative

Changing market perceptions on alternatives to AMCs

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The first thing to recall is that AMCs are not an HVCC compliant solution at all.

The lawsuit by the New York AG’s office, which resulted in the creation of the HVCC (see page 12), was filed against a lender who pressured a major national AMC to use only those appraisers who hit the lender’s requested numbers.

Just hiring an AMC but then sending them legally discoverable emails to the effect of “find someone else to make the deal work” is obviously not any sort of HVCC-compliant “firewall.” Yet it happens all the time. In an age when consumers are emboldened by class-action suits and public officials look to score high-profile populist victories, that’s a massive risk.

It’s not mitigated by simply eliminating mortgage brokers from the process either. They’ve been a scapegoat to date, but the fact is that loan officers and mortgage brokers have had virtually identical fraud rates for years. Bad internal loan officers e-mailing their contacts at AMCs create a paper trail a mile wide, and it leads right back to the lender.

The industry needs to be made aware of that risk by publications such as this. Only risk aversion will result in lenders employing a smarter mix of automation, employee training, and stringent internal controls.

On the automation front, systems like our Mercury Network reduce exposure by eliminating the pressure option completely. For example, our bi-directional double-blind firewall provides realtime managed status without anyone knowing or selecting the appraiser, or communicating with them in any ad hoc manner. To the contrary, most large AMCs are still highly dependent on their staff manually selecting, calling, and e-mailing appraisers. Put simply, we believe that “people with headsets working on commission,” are too likely to engage in risky behavior, and lenders pay the price when they do.

Even if a mortgage lender is currently happy using just a traditional AMC, they still need specific valuation technology, staff training, and fraud controls in place for actual HVCC compliance. Like all risk aversion, a layered strategy works best.

Lenders should take the time to investigate the multiple options of mature non-AMC, technologycentric management platforms available. It’s usually free to test drive them with a small number of appraisal orders to see how they work. There’s nothing to lose, but so much to gain, that not performing that due diligence could be the riskiest behavior in the whole process.

Dave Biggers is chairman of a la mode, inc.

T e ch / t h e a mc a lt e r n a t i v e

HVCC isn’t without its difficulties, Bien-Aime added, but doing away with the guidelines altogether would be throwing the baby out with the bath water. “Is HVCC perfect? No,” he said. “Is it necessary? Absolutely.”

Another concern software developers have is where the AMCs interest lie. An AMC’s motivation is to keep their clients happy and maximize their margins. AMCs oftentimes won’t pick the most quality appraiser, but will rather pick the lesser-cost appraiser, Black said. “The motivation for the lender is to be compliant, and the fact that they would outsource to an AMC whose motivation is margins has always been surprising to us.”

As more lenders start to embrace appraisal management technology, the original target audience — community banks, credit unions and regional banks who want to maintain their established appraiser relationships — has been expanded to include warehouse lenders looking to customize their appraisal needs. As the audience and demand for Appraisal Firewall has evolved, Chiappe said his firm has added functionality, including a recently enacted message management feature that was implemented in October.

The cost of implementing an appraisal management software depends on the size of the financial institution.

There is the initial cost of integrating the software into the lender’s origination process, and most software options charge a per-appraisal fee.

Another appraisal issue software firms say technology can fix deals with transfer. If a borrower initiates a mortgage application but decides to take his business to another lender, appraisal transfers can reduce borrower costs.

“The biggest issue that hasn’t been addressed with the HVCC is portability,” Bien-Aime said. “It’s extremely difficult to transfer appraisals between lenders.”

Global DMS recently launched a no-cost online tool for lenders to securely electronically transfer and receive HVCC-compliant appraisals.

But whether appraisal management software becomes more prominent depends on increased exposure, Bien-Aime said. “It’s not as prominent as AMCs, but it comes down to education and awareness of the other options out there,” he said.

“It’s really about getting the message out.”

°

10+!

For more than 10 years, FNC has converted paper to data to knowledge for the nation’s largest mortgage lenders and servicers.

Now, new regulations require lenders to submit appraisal information as electronic data. As always, FNC systems make it a cinch.

FNC’s Collateral Management System® (CMS®) and Collateral HeadquartersTM (CHQ) can deliver data directly to the Fannie Mae CDD portal, easily complying with new secondary market guidelines. The FNC systems have fundamentally changed real estate collateral processing and review, helping financial institutions: • Ensure compliance to regulatory guidelines • Decrease their mortgage lending and servicing processes from weeks to days • Reduce collateral risk by automating valuation review FNC has you covered on Collateral Data Delivery. Visit www.fncinc.com to realize the efficiency of one process for appraisal data delivery to the secondary market.

For more information, contact Charles Hurst toll-free at 888-649-2966 or sales@fncinc.com.

Know Your Collateral

d at a How much for an appraisal?

Mercury Network, the online vendor management platform of Oklahoma City-based a la mode, inc., launched its Appraisal Fee Reference this year. It is a guide to the median and average appraiser fees paid for Uniform Residential Appraisal Report. The charts and graphs in this section were created using the Fee Reference report for the month of February.

Median fee by state

32

Florida Georgia Guam Hawaii Idaho Illinois Indiana Iowa

5

$372

41

$380

1

$346

8

$331

30

$341

40

$396

38

$342

4

$339

9

$609

46

$560

32

$391

42

$296

3

$316

12

$317

24

$370

26

$297

34

$357

10

$360

36

$382

21

$322

14

$325

16

$328

15

$364

48

$337

23

$471

49

$371

35

$345

28

$340

39

$361

19

$378

37

$339

22

$336

7

North Dakota Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

Volume Share Rank

$340

Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina

Average Fee ($)

53

State

29

$615

State

Volume Share Rank

$374

Volume Share Rank

District of Columbia

Average Fee ($)

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware

Average Fee ($)

focus

Property Valuation

Data

State

$420–$600 $400 $370–$385 $350 $325–$340 $300

$469

50

$299

12

$352

31

$414

17

$323

6

$334

44

$305

43

$342

33

$378

52

$355

20

$358

2

$388

27

$387

51

$383

11

$413

18

$362

47

$326

25

$476

45

division 9: pacific

eg

or

or

1.

k ar

an

do

3.

l na co rizo a

s

0 as

ok

.34

la

h

86 4.

%

05

%

%

a om

1.1

5%

lou

n isia

.1 a3

5%

tex

as

7.69

%

7

division 5: south atlantic

division 7: west south central

5% i 0.1 issippky 0.65% % s s i m ntuc 1.34 ke 3% ama alab nessee 2.0 n te 0.18% irginia west v ico 0.21% puerto r

6

R eg i on 3

division 6: east south central

delaware 0.34%

district of columbia 0.36%

5

REGION 2: midwest

South Carolina 0.88%

maryland 1.

93%

division 3: east north central

virginia georg

2

nort

2

io

2.

in

94

di

%

a

w

an

Ne

2.

97 %

Ill in oi

%

.84 %

%

ania sylv

2.07

s4

.90

sey

k1

jer

r Yo

new

Penn 3.94

%

.10% ont 0 verm island 0.26% 5% rhode pshire 0.3 new ham Maine 0.60% Connecticut 1.24% Massachusetts 2.82%

Data

3

oh

1

i

1

h ca Sou rolin no th D a 3.8 rth ako 7% Fl orid ta d ne a 4. br akot 0.08 as 6 % a 8% ka ka 0 0.12% .60 n % iow sas 1 mi a 1.6 .57% ss ou 5% ri mi w nn 1.87 isc % e so on ta sin 2 .81 m 1. ic % 64 hi % ga n 2.

34 %

Property Valuation

R e g i on

ia 3.62 %

4

on

g Re

REGION 1: northeast

2.98%

Source: appraisal fee reference Feb 2010 mercury network / a la mode

focus

division 4: west north central

division 2: middle atlantic

5

a or

3%

8

REGION 3: south

division 1: New england

by census division & region

lif

ca

ah ut

Reg ion 4

division 8: mountain

on 2.2 9% m n ia on 1 w t 0 a .25 y id om na % 0.1 ah in g ne 3 o % 0.

0 w 2 m .33% 0% ex n ev i ad co 0 a 1. .44 % 34 %

hin g to 2.19 n % wa s

ii 0.9 5% h awa

g ua m 0 .19%

alaska 0.01%

9

REGION 4: west

percentage of appraisal fee volume

33

r efer e n c e The Valuation Directory A survey of valuation service providers and companies HW Focus polled executives at a number of the industry’s leading valuation service providers and companies. The surveyed firms were asked to provide information on their broker price opinion (BPO), automated valuation model (AVM) and appraisal services, where applicable, as well as to breakdown the percentage each valuation service comprised in their total business operation. Firms were also asked if they offer value reconciliations and each company provided a short description, in their own words, of what their company does.

Company Name

BPOs

AVMs

Full Appraisals

Value Reconciliations

Clear Capital

Yes

Yes

Yes

Yes

ABOUT: Clear Capital is a premium provider of real estate valuations, data and solutions for the largest U.S. banks, investment firms and other financial organizations. Our products include appraisals, AVMs, BPOs, home data indices, market data and value reconciliations. Clear Capital differentiates itself by providing unrivaled levels of customer service and progressive technology tailored to supporting the most critical business decisions in the lending industry. When valuations need to be done right, the industry turns to Clear Capital.

Coester Appraisal Group

Yes

Yes

Yes

Yes

ABOUT: Established in 1970, Coester is a full service AMC. Appraiser owned and managed, Coester is renowned for its service levels and turn-around times and offers a 100 percent guarantee on its services, which include appraisals, BPOs, AVMs, appraisal reviews, inspections and more. Clients can work with their own appraiser panels or use Coester’s nationwide network comprised of every licensed and certified appraiser in the country, as well as a core group of staff and vendor providers.

First American Information Solutions Company

Yes

Yes

Yes

Yes

ABOUT: First American Information Solutions is a major provider of residential appraisals, BPOs and hybrid solutions through its Valuation and Property Solutions segment; and AVMs and default AVMs through First American CoreLogic.

Fiserv

No

Yes

No

No

ABOUT: Automated Valuation Models (AVMs) from Fiserv provide fast value estimates and predictive collateral scores for residential properties across the United States. The Fiserv offering instantly determines property values in real time, providing high-quality valuations while reducing time and cost. Our AVMs leverage a very large, meticulously filtered property-records database and multiple, market-specific analytical approaches to estimate current market values. AVMs are available as a subscription or in a trial packet via credit card.

FNC

Yes

No

No

Yes

ABOUT: FNC pioneered real estate collateral information technology by developing collateral valuation workflow platforms that automate vendor management, ordering of collateral services, tracking, reconciliation, documentation, and review. In origination, the systems support lender compliance with OCC, OTS, Federal Reserve, FDIC and other regulations. Comprehensive risk review is also provided based on over 1,200 compliance and generally accepted appraisal rules (GAAR). Clients automatically and quickly process the valuation and reconciliation of large volumes of loans and portfolios for short sales, REOs, write-offs and loan modifications.

focus

Property Valuation

Reference

iMortgage Services

34

Yes

Yes

Yes

Yes

ABOUT: iMortgage Services is a full service appraisal and title management company. Services include: two- and three-tier and forensic appraisals, quality control field reviews, desk appraisal reviews, FHA, origination and REO appraisals, reconciliations, BPO services, commercial valuations, document retrieval and custom services.

Interthinx

Yes

Yes

No

Yes

ABOUT: More accurate than an AVM and less expensive than a BPO, the Interthinx CVM combines a third party exterior property inspection with the robust data and analytics of an AVM. MLS data in the valuation model considers both the comparable sales and competing listings in the subject neighborhood, adding to the accuracy. This first of its kind integration of a real-time property inspection and analytics makes the CVM more accurate and cost-effective than other solutions available today.

ISGN Corporation

Yes

Yes

Yes

Yes

ABOUT: ISGN provides technology, products, and services to the financial industry. Our valuation solutions include BPOs, AVMs and appraisals, as well as some appraiser-assisted or broker-appraiser products. Our vendor management and quality control teams manage the contractors and staff for compliance and client requirements. We offer full integration capability as well as technical support for all ISGN products and services.

Company Name

Lender Processing Services

BPOs

AVMs

Full Appraisals

Value Reconciliations

Yes

Yes

Yes

Yes

ABOUT: With a full spectrum of valuation and collateral risk assessment solutions, developed and produced by experienced valuation professionals, LPS partners with mortgage originators, investors and servicers to determine the right solution for their valuation and collateral risk management processes. LPS’ valuation solutions include market-leading data and modeling, high-performance technology, local real estate professionals and experienced appraisers to meet virtually any valuation need.

Mark To Market

Yes

Yes

Yes

Yes

ABOUT: Mark To Market is a valuation services industry leader in quality, service and technology. The company was founded and is run by industry experts and has the most experienced management team in the business. Mark To Market’s proprietary Web-based workflow system is state of the art and is hosted in a SAS 70 Cert II facility. It is the continuous pursuit of excellence that ensures we always meet and exceed client expectations. Quality is the driving force behind M2M — it is our passion and constant focus.

PCV Murcor

Yes

No

Yes

Yes

ABOUT: PCV Murcor has been providing the most accurate, highest quality appraisals and BPOs to lenders and servicers for almost 30 years.

Founded, owned and operated by an appraiser, we believe that quality is what sets us apart from our competition. PCV employs a higher percentage of licensed and certified review appraisers than any other valuation management company in the nation. This not only improves quality, it provides our clients faster turn-times. A valuation from PCV ensures you will have a highly credible and well-supported property valuation. A value you can trust and gives you the utmost confidence you need to make decisions in executing your business strategy.

Pro Teck Valuation Services

Yes

Yes

Yes

Yes

ABOUT: Pro Teck Valuation Services is most proud of the accuracy and customer service we provide our lender, servicer and investor clients.

No other valuation provider works closer with clients to help them understand the power of better real estate collateral information and its role in their risk management strategy. Once ProTeck determines the right service set to support the client’s individual decision methodology — they’ll customize its delivery based on their business rules and workflow system.

Quality Valuation Services

No

Yes

Yes

Yes

ABOUT: Quality Valuation Services provides valuations nationwide. QVS was founded by banking and appraisal executives with substantial experience in the mortgage industry. QVS utilizes advanced software technologies and proprietary fulfillment processes to deliver exceptional service and high quality products. Headquartered in California, QVS founders formed the company to address the need for HVCC-compliant appraisers delivering uncompromised appraisal products. QVS assures adherence to newly enacted regulations through commitment and accountability to transparency, integrity, competence, and reliable service.

RELAR

No

Yes

No

Yes

ABOUT: RELAR (Real Estate Liquidity Analysis Report) provides a unique approach to valuation for today’s markets. RELAR answers a twodimensional question: “How much will a property sell for and how long will it take?” RELAR incorporates several unique features: Location, Location, Location — RELAR analyzes property specific geographic data through our proprietary Geo-Image Analysis (GINA) technology; Multiple data sources — Public record and current market; High hit rate and accuracy through database cross-correlation.

Solidifi

No

Yes

Yes

Yes

ABOUT: Solidifi believes quality appraisals start with paying a professional appraiser their full fee — no splits. Solidifi believes lenders should be able to work with appraisers as they define it. Lenders can work with their existing appraiser panel exclusively, or the Solidifi National panel of appraisers or a smart combination of both. Solidifi believes in offering leading edge, flexible technology and offering proactive compliance solutions to enhance any lenders appraisal process. Solidifi is the next generation of appraisal management.

Yes

Yes

ABOUT: StreetLinks does one thing — appraisal management. The StreetLinks team was built on a combination of mortgage lending and appraisal management experience to provide a total appraisal solution. With the best local appraisers in every market, certified HVCC and FHA compliant process, manual QC review of each appraisal, automated TILA compliance, warranty of appraisal quality and $1 million performance guarantee.

Veros Real Estate Solutions

Yes

Yes

Yes

Yes

ABOUT: Veros’ Valuation Risk Management (VRM) system is the industry’s most comprehensive appraisal, BPO, and AVM enterprise quality control platform for ordering, reviewing, and managing all property valuations from origination through servicing. As the technology provider for Fannie Mae’s Collateral Data Delivery (CDD) system, Veros represents the most efficient way to connect to Fannie Mae. Veros is responsible for building, maintaining and supporting the CDD system, in addition to handling direct lender integrations.

Zone Data Systems

No

No

Yes

Yes

ABOUT: Zone Data Systems’ professional appraisers manage tracts of property zones. They have analyzed property data from county assessors and have grouped homes into markets based on property styles and types. Each property receives a value through a process called GeoScoring. This is all done in advance of the client’s request. The final outcome is a credible opinion of value from a professional appraiser that is ready for near instant delivery.

Reference

Yes

Property Valuation

No

focus

StreetLinks National Appraisal Services

35

r efer e n c e The Home Valuation Code of Conduct According to information provided by Freddie Mac, the HVCC: • Prohibits lenders and third parties from influencing or attempting to influence the development, result or review of an appraisal report.

• Requires lenders to ensure that borrowers are provided a copy of the appraisal report no less than three business days prior to closing, unless the borrower waives the requirement. The lender may require the borrower to reimburse the cost of the appraisal, but the lender must provide a copy of the appraisal report to the borrower at no additional cost.

• Requires any third party specifically authorized to perform certain actions on behalf of the seller to be in compliance with the code.

• Requires lenders or third parties authorized by lenders to be responsible for selecting, retaining, and providing for payment of all compensation to appraisers. The code does not allow any other third parties to perform these activities.

• Employees responsible for the credit administration function or credit risk management are not considered loan production staff.

• A lender, in connection with the loan being originated, may accept an appraisal report prepared by an appraiser for a different lender provided that the lender obtains written assurances from the other lender that it has adopted the code and determines that such appraisal conforms to appraisal requirements and is otherwise acceptable.

• Requires absolute independence within a lender’s organization between the appraisal function and loan production and limits communication with the appraiser.

• A lender’s loan production staff is prohibited from being involved in the selection of the appraiser, or having any substantive communications with an appraiser or appraisal management company about valuation.

• The loan production staff consists of those responsible for generating loan volume or approving loans, as well as their subordinates. This includes an employee whose compensation is based on loan volume or the closing of a loan transaction.

focus

Property Valuation

Reference

The lender’s use of an appraisal report prepared by an in-house appraiser or an affiliate in underwriting must meet certain conditions, including:

36

• The appraiser, or the company for which the appraiser works, reports to a function of the lender independent of sales or loan production, and sales and loan production staff have no involvement in the operation of appraisal functions or selection of the appraiser.

• The appraiser’s compensation does not depend on final estimate of value or closing of the loan.

• Sales and loan production staff are not allowed to have substantive communications with in-house appraisers relating to or having an impact on valuation and do not provide the appraiser any estimated or target value of the property or loan amount (except a copy of the purchase contract may be provided.)

• Lenders may use appraisal reports prepared by other entities engaged by the lender to provide other settlement services for the same transaction, as long as certain conditions are met.

• The lender has written policies and procedures implementing the code and has mechanisms to report and discipline any violators.

• The lender’s appraisal functions are either annually audited by an external auditor or are subject to federal or state regulatory examination, and the lender provides to Freddie Mac any adverse audit findings indicating code non-compliance.

• With respect to loans sold to Freddie Mac, lenders are required to quality-control test a randomly selected 10 percent (or other statistically significant percentage) sample of appraisal reports or valuations used by the lender, and report any adverse findings, including non-compliance of the code, to Freddie Mac.

• Allows lenders to also use in-house staff appraisers to: 1) order appraisals; 2) conduct appraisal reviews and other quality control functions; 3) develop, deploy, or use internal automated valuation models; and 4) prepare appraisals in connection with transactions other than mortgage origination transactions, such as workouts, if the lender complies with the terms of the code.

• Allows sellers with an asset size of less than $250 million to be considered a small bank as defined in 12 U.S.C. Section 2908 and exempting them from the requirements in Section IV of the code. Sellers that qualify for this exemption must represent and warrant that they have in place appropriate policies and procedures, as well as adequate controls to prevent undue appraiser influence.