The following letter was sent to the director of the Office of Federal Housing Enterprise Oversight (OFHEO) to comment on the proposed Home Valuation Code of Conduct (HVCC). Comments were also sent to officers at Fannie Mae and Freddie Mac.
April 25, 2008
James B. Lockhart III
Director
Office of Federal Housing Enterprise Oversight (OFHEO)
1700 G Street, NW 4th Floor
Washington, DC 20552
Re: Comments on Home Valuation Code of Conduct (HVCC)
Dear Mr. Lockhart:
Our company has partnered with approximately 10,000 independent appraisers throughout the United States who cumulatively serve more than 500 mortgage lenders and financial institutions. We agree there is a structural conflict of interest that has compromised the independence of appraisers. Thus, we applaud and are supportive of the efforts to secure the objectivity and independence of appraisers.
Abuses occurring during the last mortgage crisis from 1980 to 1995 when 2,912 financial institutions with $924 billion in assets failed involved compromises of the independent role of appraisers. Our observation is that with today’s crisis, the appraiser independence problem is even worse.
We believe the compromise of appraiser independence has seriously threatened and will continue to threaten the safety and soundness of our nation’s financial institutions, as it has eroded investor confidence and has led to the current mortgage liquidity problems.
We agree the time for action is now and that the HVCC policies are an important first step.
We anticipate that some lenders and mortgage brokers will resist the proposals and request significant changes. We strongly urge you to stand firm and not weaken the proposals nor delay their implementation.
Independent Valuation Protection Institute (Institute)
We believe there are eleven specific unintended consequences associated primarily with the establishment of the Institute that would impede successful implementation of the HVCC.
Among our proposals is to assign the important tasks of the Institute to the Appraisal Foundation, which is currently the sole organization recognized by Congress and authorized to issue official industry-wide national appraisal standards.
It is important to note that various government agencies, lender related organizations, the public, state appraisal boards, and appraisal organizations are all represented at the Appraisal Foundation. We believe much of the criticism of the HVCC will stem from the lack of industry input in its development and further evolution.
Conversely, since the Appraisal Foundation has existing procedures to develop policies and receive feedback and consideration from all industry participants, we believe it would be the appropriate organization to be aligned with implementing the HVCC and supporting the Institute.
Unintended Consequences
1. Conflicts with current legislation. The lack of legislative authority for the Institute threatens its market acceptance and viability. Congress has granted authority to establish national appraisal standards to the Appraisal Foundation and its independent boards - the Appraisal Standards Board (ASB) and Appraiser Qualifications Board (AQB).
a. Recommended Amendment #1: The Institute shall be established as a third board of the Appraisal Foundation to be named the “Appraiser Independence Board” (AIB).
Comment: The Appraisal Foundation currently consists of two independent boards known as the ASB and AQB. Lenders, federal agencies and all 50 states are required under existing federal law to observe standards of both the ASB and AQB. Housing this important new board within the Appraisal Foundation ensures its provisions would become legally binding on all lenders and all states. Current members of the Appraisal Foundation are at-large members of the public and organizations that represent: lenders, non-profit professional appraiser and banking societies, federal agencies and state appraisal boards. Thus, the Appraisal Foundation broadly represents the entire industry. Placing the Institute as a third Board within the Appraisal Foundation would provide instant industry-wide acceptance, credibility and legislative authority. The Appraisal Foundation has the necessary existing staff and expertise to administer this program and in fact already fields calls and inquiries from the public on appraiser and appraisal issues and could fulfill this mission more cost effectively than any other organization. Selection of any organization other than the Appraisal Foundation would conflict with current legislation and result in two different organizations establishing appraisal standards and would confuse the market.
2. Section V of the HVCC requires qualification standards for those selecting appraisers. This is in conflict with the authority granted by Congress to the Appraisal Foundation.
a. Recommended Amendment #2: The qualification standards of section V of the HVCC shall be established by the Appraiser Qualification Board (AQB) of the Appraisal Foundation, which has been authorized by Congress to establish qualification standards. Lenders, correspondents, and others selecting appraisers on behalf of the lender should be required to observe these standards.
Comment: The AQB currently has congressional authorization to establish qualification standards and is well equipped, experienced and best able to fulfill this mission.
3. Section VIII of the HVCC requires lenders to measure and test appraisal and valuation quality. That testing and reporting of results cannot occur unless appraisal quality is defined. Also, Section I references “substandard performance” and “unprofessional behavior” of appraisers but these terms are not as of yet defined. Congress has granted sole authority to establish and define appraisal quality and appraiser standards to the Appraisal Standards Board of the Appraisal Foundation, and requires those standards to be observed by lenders and adopted by and enforced by all the states. Establishing a second organization (other than the Appraisal Foundation) that also establishes appraisal quality standards and defines acceptable levels of appraiser performance would result in a potential conflict with congressional and state legislation, and confusion in the market. This also would require appraisers to observe two different standards of care that may differ.
a. Proposed amendment #3: Authority to establish and define best practices, quality, performance, behavior, and standards for appraisers along with uniform standards of appraisals, automated valuation models, broker price opinions, desktop and all other real estate valuations utilized by lenders, along with all quality testing reporting requirements of Section VIII shall be developed, established, and coordinated by the three independent boards of the Appraisal Foundation known as the ASB, AQB and AIB. Lenders shall be required to observe all standards established by the ASB, AQB and AIB boards. Testing of appraisal results shall be measured in the context of the degree of compliance with these established best practices and standards.
Comment: The Appraisal Foundation and its independent boards are currently authorized by Congress to establish these standards, it has the necessary experience and its standards are required to be observed by lenders, federal agencies, all 50 states, and in established case law at both the state and federal levels.
4. The initial funding, while generous, is not sufficient to fulfill the mission. With no long-term, on-going or self-funding source being clearly identified the authority and credibility of the Institute is threatened, as well as its long-term viability. The requirement for every lender to establish their hotline might be viewed as a difficult financial burden on small lenders and is far less economical than having one centralized hotline. Also, having two different hotlines may result in confusion in the market.
a. Proposed amendment #4: Lenders shall be required to use the hotline established by the Institute, and to disclose that number and website to borrowers. Lenders shall be required to pay a monthly fee for administration of the hotline. Failure to pay the fee could result in termination of the lenders ability to sell loans to Fannie Mae or Freddie Mac. The lender shall have the right to establish its own hotline but information regarding the number of calls, outcome of those calls and summary of investigations taken must be shared monthly with the Institute. The lender shall establish an independent position or department independent of all lending functions to investigate complaints referred to it from the Institute hotline.
Comment: Having a centralized hotline administered by the Institute or AIB (rather than thousands of individual hotlines) is significantly more economical, eliminates confusion, reduces the financial burden to lenders, and ensures that appropriate action is taken when compromises of appraiser independence are identified. Creation of this nominal monthly fee provides for a long-term sustainable way to fund the important work of the Institute. Given the large number of lenders in the country, this fee would likely be quite low, perhaps initially in the range of $10 to $30 per month, but would vary based on the operating costs of the Institute, and likely be far below the costs each lender would need to absorb if required to establish thousands of individual hotlines.
5. The only existing identified recourse in instances when appraiser independence is compromised is forcing lenders to buy back loans. This means that compromise of appraiser independence may go unaddressed allowing a structural conflict of interest problem to continue. Also, the lack of any true authority of the Institute weakens the ability to mediate and to overcome the problem of appraiser independence.
a. Proposed amendment #5: Seek legislative authority to establish appropriate fines to be assessed on lenders, correspondents, mortgage brokers, and others in instances when attempts to inappropriately compromise appraiser independence and meaningfully affect the value conclusions of an appraiser have been found. Fannie Mae and Freddie Mac may consider the amount and number of fines assessed in reaching its decision regarding whether loans shall be required to be repurchased by lenders, or in terminating the lenders right to sell loans to Fannie Mae or Freddie Mac. Authority shall be granted to the Appraisal Foundation to establish best practices and quality standards and potential fines should be assessed based upon a finding of deviation from those standards.
Comment: This authority would allow the Institute to be more effective in its mediation role, result in improved ability to address compromises of appraiser independence, and help to restore confidence in the independence conclusions of appraisals since market participants would be more inclined to comply. Also, these definitions of when fines would apply would help reduce frivolous claims.
6. A process for selection of Board Members before and after the sunset period is unaddressed creating confusion, reducing effectiveness, market acceptance, and threatens viability.
a. Proposed Amendment #6: All Board Member vacancies shall be advertised nationally, providing all interested applicants with the ability to be nominated or self nominated. Board Members shall be selected by the Trustees of the Appraisal Foundation.
Comment: The Appraisal Foundation is an existing non-profit organization that currently represents the public and all affected parties. It advertises annually for Board Member positions for the ASB and AQB and has an existing process for collecting, evaluating and selecting prominent, well qualified board members.
7. The use of the term “any financial connection” in relation to selection of Board members appears over reaching and would result in the elimination of well-qualified board members even though no real conflict of interest exists.
a. Proposed Amendment #7: Current employees of Fannie Mae, Freddie Mac, or OFHEO, nor any candidate who has an existing financial connection greater than $50,000 to those organizations are not eligible for board membership.
Comment: Clarifies potential conflicts of interest
8. The list of those who could file complaints regarding appraiser independence is limited to appraisers and consumers although lenders and others might have knowledge of abuses.
a. Proposed Amendment #8: Appraisers, consumers, lenders or other affected parties may file complaints with the hotline.
Comment: Clarifies that the hotline will accept complaints from all affected groups.
9. Having lenders report quality testing results bi-annually does not seem to help address structural conflicts of interest in a timely manner. Confidentiality of data needs to be protected.
a. Proposed Amendment #9: Lenders shall report the results of quality testing at least twice per year or as required by the Institute. Data supplied by lenders for test result purposes shall be deemed confidential and not distributed to third parties, but aggregated summary findings may be publicly released.
Comment: Increasing the report frequency will help better detect structural problems.
10. States are under funded yet the number of complaints sent to state appraisal boards could rise considerably.
Comment: Amendment #5, which provides authority to issue fines, would help address this issue.
11. The term “Institute” is already in use within the industry and potentially infringes upon the trade name “Appraisal Institute” and would create confusion in the industry.
Comment: Proposed amendment #1 renaming it to the “Appraiser Independence Board” or AIB would resolve this issue.
Thank you for this opportunity to comment.
Sincerely,
Thomas J, Inserra, MAI, SRA
Chief Executive Officer
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