The original March 2008 agreements between the Attorney General of New York, the Office of Federal Housing Enterprise Oversight (now the Federal Housing Finance Agency) and Fannie Mae and Freddie Mac that established the Home Valuation Code of Conduct will expire in November 2010 (originally July 2010). After that, Fannie Mae and Freddie Mac are no longer obligated to maintain the HVCC.

In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has already passed the House of Representatives, contains a provision (§ 129E. Appraisal independence requirements) which says,

‘(j) SUNSET.—Effective on the date the interim final regulations are promulgated pursuant to subsection (g), the Home Valuation Code of Conduct announced by the Federal Housing Finance Agency on December 23, 2008, shall have no force or effect.’

Does this mean that the Home Valuation Code of Conduct has a future?

Yes. Even if the provisions that the mortgage community are following today are not called the HVCC, the concepts in the HVCC will live on. Certainly Fannie Mae and Freddie Mac have both embraced the HVCC, declaring the quality of appraisals they receive has improved as a result of the HVCC. They are likely to resist losing many of the protections they found in the HVCC even if the HVCC itself is abolished.

If you think about it, the HVCC is made up of several different components, many of which have been long recognized as important:

• Appraiser independence
  
• Copy of appraisal
  
• Appraiser engagement (who can engage an appraiser)
  
• Quality control
  
• IVPI
  
• Referral of appraisal misconduct
  

In fact, many of these are already required (even without the HVCC). For example, language very similar to the appraiser independence language in the HVCC is already incorporated into many state laws, into Truth in Lending, and in the Dodd-Frank bill. Providing the appraisal to the applicant upon request is already required in the Equal Credit Opportunity Act (and language requiring that all applicants receive a copy of the appraisal, similar to the HVCC language, is also in the Dodd-Frank bill).

Probably the most “controversial” provision in the HVCC has been appraiser engagement. The federal rules have always required the appraisal process to be independent from the lending/production process. That was reinforced in the HVCC, and was not that much of a change. However, there were other provisions that were controversial. First, lenders were no longer able to accept appraisals ordered by mortgage brokers. Appraisers had complained about the pressure they experienced from mortgage brokers. To eliminate the temptation for mortgage brokers to influence the results of the appraisal, the HVCC simply forbid mortgage brokers from ordering appraisals. While this relieved the pressure, the “unintended consequence” was that many appraisers who received their assignments from mortgage brokers immediately lost their clients.

Will this policy change if the HVCC is no more? It is unclear, although Fannie Mae and Freddie Mac have been pleased with the results of this change and will not want to return to the past practice.

The other controversial element is the mistaken understanding that the HVCC either created appraisal management companies (they have been in existence and active for more than 30 years) or that lenders were required to use appraisal management companies. Neither of these is true, but it is clear that more lenders chose to use appraisal management companies to manage their appraisal requirements as a result of the HVCC. Again, it is not clear whether or not this trend will continue if the HVCC ceases to exist. The steady decline in the demand for appraisal services in the last four or more years (leaving an oversupply of appraisers with its downward pressure on fees and assignments), along with the decline in the demand for mortgage loans has also influenced the way lenders have managed their appraisal requirements. It is not clear how this might change if there were an upturn in the demand for mortgage loans (and appraisal services).

Finally, there are some other issues in the HVCC that are important: the IVPI, the appraisal quality control requirements, and the referral of appraisal misconduct reports. The IVPI itself has declined in importance throughout the HVCC period. In fact, the FHFA recently announced that Fannie Mae and Freddie Mac will not fund the operations of the IVPI as originally envisioned in the HVCC. Instead, the two GSEs will individually maintain the hotline services that were intended for the IVPI. There is another hotline provided for in the Dodd-Frank bill. The appraisal quality control requirements are very similar to those already imposed on federally regulated institutions, and under the ordinary quality assurance requirements that Fannie Mae and Freddie Mac impose on all seller-servicers. As to the referral, the requirement to refer appraisal issues to the various state appraiser regulatory agencies is now common, and is included in the Dodd-Frank bill as well. Let us hope that the state appraiser regulatory agencies have the funding and capacity to respond to the increase in reports that they receive. Most state appraiser regulatory agencies have been frustrated by their lack of resources to date to carry out their duties.

So, does the HVCC have a future? It may be that what survives is not called the HVCC, but since most of the provisions in the HVCC are already incorporated in federal law and many state laws, its substance will certainly continue.

The telling point is that Fannie Mae and Freddie Mac have both declared that the quality of appraisals they receive has improved as a result of the HVCC—that is certainly something that everyone applauds and hopes will continue.