The Home Valuation Code of Conduct (Code) announced by Fannie Mae and Freddie Mac (Enterprises) in December 2008 was developed after a long period of public input and was deployed on May 1, 2009, after a four-month transition period. The Code expanded on existing Enterprise appraisal standards, seeking to redress problems that contributed to the current mortgage crisis and to improve the quality of the mortgage loans they purchase.

Unfortunately, during the 2005 to 2007 period, mortgage lending was much too aggressive and placed pressure on the appraisal process. In some cases, that resulted in unrealistically high appraisals, hurting homebuyers as well as investors. The HVCC is designed to promote professional appraisals free from inappropriate pressure from lenders, borrowers or brokers.

The Code’s main purpose is to protect appraisers and the quality of appraisals from undue influence and conflicts of interest. The Enterprises continue to address questions on implementation and today provided additional FAQs. Also, they are finalizing a complaint form relating to Code violations.

Market participants should appreciate the difficulty facing appraisers when valuing properties in a declining market, especially when sharply dropping home prices and foreclosures are prevalent. The challenges of appraising properties exist with or without the Code. Market participant concerns in the current circumstances would create appraisal controversies even without the Code. Indeed, the Code should help mitigate these controversies by providing clearer protection for appraisers.

The Enterprises have taken additional actions. For example, Freddie Mac recently issued an alert to mortgage lenders advocating the use of qualified and experienced real estate appraisers, including those appraisers affiliated with a professional organization. This was similar to a Fannie Mae pronouncement. The Appraisal Institute termed this a victory for efforts to promote more professional appraisals and said it would "have a positive effect on millions of home buyers and sellers." The GSE guidances reinforce existing professional standards that appraisers must be familiar with the local market where the property is located and highlighted that appraisers must choose appropriate sales comparisons.

Misinformation has been circulated about the content of the Code and some have tried to cite the Code as the source of unrelated market dislocations. FHFA believes that the Code is serving the intended purpose and will continue its oversight role both as to the implementation of the Code by the Enterprises and its market impact.

Some key items that the public should know:

Communications with appraisers– Contrary to some suggestions, the Code provides for communications with appraisers about errors, additional needed information and unprofessional conduct. Quality control personnel may communicate with appraisers and other lender personnel, outside of the loan origination function. The real bar is on communications that seek to influence the appraiser to adopt a set valuation, which is prohibited.

Low appraisals— Contrary to some suggestions, the Code does not lead to lower appraisals for property. The Code insulates appraisers from pressures that led to higher or lower appraisals and should now lead to more accurate valuations. This is in everyone’s interest. Declining home prices began long before the deployment of the Code and relate to many other factors. Current efforts at mortgage market stabilization are a central focus at FHFA and the Enterprises, but that needs to be achieved by keeping borrowers in their homes, not urging appraisers to improperly overvalue homes.

Appraisal management company (AMC) role— Contrary to some suggestion, the Code does not favor the use of AMCs over independent or in-house appraisers. Significantly, for the first time, the Code places the same requirements for appraiser independence on AMCs as the limits placed on lenders. Lender use of AMCs was increasing prior to the Code and one of the key goals and results of the Code was to strengthen appraiser protections when engaged by AMCs.

Unqualified or out-of-area appraisers– The Uniform Standards of Professional Appraisal Practice (USPAP) requires that an appraiser be competent and knowledgeable of the local market to perform an appraisal. In addition, in reinforcing USPAP, the Enterprise appraisal guides require appraisers to have knowledge of the local market. The use of unqualified in-state or out-of-state appraisers, unfamiliar with local conditions, should be reported to state appraiser licensing agencies.

Increased costs at closing— Closing costs have risen in some instances, but that has not been a function of the Code. Lenders have tightened underwriting standards, often requiring additional comparables by appraisers and even requiring second appraisals. Market investors have focused on reducing fraud and sought greater assurances about valuations. Appraisers have been working hard to meet these requests.

Turnaround times for appraisals— The Code may initially have slowed appraisal time as it was being implemented. However, there are other reasons for turnaround time changes; these include increased demands by lenders, the efficiency of a particular lender’s underwriting process and the workload of appraisers. The Code’s appraiser independence standards are critical for accurate valuations, a lesson learned in the current market crisis. Assuring a good appraisal is in the borrower’s interest. As the market adjusts to new underwriting standards, including those for appraisals, more efficiency will reduce turnaround times.

Transferring an appraisal – Contrary to some suggestions, appraisals are transferrable between lenders under the Code. Transferring an appraisal may obviate the consumer’s need to pay for a new appraisal should the first lender deny the loan. Whether a lender decides to transfer or

accept an appraisal, however, is up to the lender, and is not related to the Code. Lender discretion in this area predated the Code.

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The Home Valuation Code of Conduct supports the critical role of appraisers and their central role in the underwriting process. Accurate appraisals, produced in line with industry standards and legal requirements, provide key protections for homeowners, the Enterprises and investors who support the markets. The poor practices of the past are being corrected and lessons learned are being addressed.

Updated March 2009

To help enhance the integrity of the home appraisal process in the mortgage finance industry, in March 2008, Fannie Mae entered into an agreement with our regulator – the Federal Housing Finance Agency (FHFA) (then the Office of Federal Housing Enterprise Oversight) – and the New York Attorney General’s office to adopt certain policies relating to appraisals for loans delivered to us. Following a public comment period, the Home Valuation Code of Conduct has been modified and will be effective for single-family mortgage loans (except government-insured loans) that are originated on or after May 1, 2009, and delivered to Fannie Mae.

Fannie Mae has agreed to adopt the Home Valuation Code of Conduct ("the Code") for all conventional, single-family loans originated on or after May 1, 2009, that are delivered to Fannie Mae. For purposes of the Code, origination date means the date of the application. The Code will not apply to multifamily loans, or to loans insured or guaranteed by a federal agency; the Code only applies to 1- to 4-unit single-family loans sold to Fannie Mae. The Code will not apply to loans sold to Fannie Mae on or after May 1, 2009 that were originated prior to May 1, 2009.

The Code requires that an appraiser must be licensed or certified by the state in which the property to be appraised is located.

Yes. The Code does not prevent an appraiser from performing an update of an appraisal for another lender.

Yes. There is no geographic limitation.

As of this date, only Fannie Mae and Freddie Mac have agreed to adopt the Code.

Yes. The Code applies only to 1- to 4-unit single-family loans sold to Fannie Mae by mortgage originators. It does not extend to Fannie Mae’s investments in mortgage-related securities.

No, nothing in the Code requires a lender to obtain a property valuation, or to use any particular method for property valuation. Nor does the Code affect the acceptable scope of work for an appraiser in connection with a particular assignment.

Section I.B.(8) addresses the removal of an appraiser from a list of qualified appraisers in connection with influencing or attempting to influence the outcome of an appraisal. Any such removal would be subject to the requirements of the process outlined in that section. However, Section I.B.(8) does not preclude the management of appraiser lists for bona fide administrative reasons based on written, management-approved policies. Also, Section IV.B.(6) provides for lenders to have written policies and procedures implementing the Code including rules on appraiser independence, and to have mechanisms in place to report and discipline anyone who violates these policies and procedures.

No. Section I.B.(9) only prohibits a lender from ordering a second appraisal when they are attempting to influence the outcome of the first appraisal and are now "value-shopping." As a risk control measure for certain loan products, it may be common for a lender to order more than one appraisal, and this subsection does not prohibit that practice.

No.

No. The Code requires the lender to provide, free of charge, a "copy" of any appraisal report completed in association with a specific loan. The lender may require the borrower to reimburse the lender for the cost of the appraisal.

The Code does not provide a specific method of delivery. The lender is responsible for ensuring that the borrower receives a copy of the appraisal.

The lender is responsible for establishing a process and procedure for documenting the borrower’s waiver of the three-day requirement.

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Yes, for loans to be delivered to Fannie Mae. The Code requires the lender or any third party specifically authorized by the lender to select, retain, and provide for all compensation to the appraiser.

The term "loan production staff" is not defined in the Code. However, the FAQs prepared by federal agencies on the agencies’ appraisal regulations specify as follows:

"The loan production staff consists of those responsible for generating loan volume or approving loans, as well as their subordinates. This would include an employee whose compensation is based on loan volume or the closing of a loan transaction. Employees responsible for the credit administration function or credit risk management are not considered loan production staff."

A "correspondent" is a third-party entity that may originate and underwrite the mortgage. The correspondent closes the mortgage in its own name with its own funds, and sells it to the lender. The mortgage is sold to Fannie Mae by the lender.

No, the Code applies only to appraisals.

Yes. Settlement service firms may order appraisals if they comply with the Code, Sections IV.C.(1) and (2).

The Code does not apply to loans that are insured or guaranteed by a federal agency, such as FHA and VA loans.

No, the Code does not require the lender to reselect appraiser panels; however, any legacy appraisal panel must comply with the provisions of the Code.

No, Form 2075 is an inspection report. It is not an appraisal, and therefore the Code does not apply.

The Code applies to loans originated and sold to either Fannie Mae or Freddie Mac. It does not apply to appraisals performed for loss mitigation purposes.

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Compliance with the Code will be part of the lenders’ operational review.

An institution falls under the provisions of Section IV.E. of the Code if it is a seller/servicer of Fannie Mae, a regulated financial institution with asset values as specified in 12 U.S.C. §2908, and meets the requirements, if any, of the institution’s regulatory agency regarding the Interagency Appraisal and Evaluation Guidelines (SR Letter 94-55 and revisions). As with the entire Code, this provision is subject to Fannie Mae’s representations and warranties. Sellers falling under Section IV.E. are still required to comply with the remainder of the Code, including Section III, which duplicates many of the requirements of Section IV.

Fannie Mae does not require a Seller to submit documentation to become exempt pursuant to Section IV.E of the Code. A Seller claiming this exemption, however, represents and warrants that it meets the criteria of Section IV.E.

The application date is defined as the date the borrower(s) signed the application certifying that the information is correct.

Yes. Lenders may use a pre-approved list or panel to select a residential appraiser, provided that (1) any employees of the lender tasked with selecting appraisers for the list are independent of the loan production staff; and (2) the loan production staff is not involved in selecting appraisers off the list for particular appraisal assignments.

The lender must review its systems to ensure that the selection of appraiser process is in compliance with the provisions of the Code.

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Yes, in-house appraisers may prepare appraisal reports if the conditions of Section IV.B. are met.

Yes, a lender may use an appraisal that has been adjusted by an in-house appraiser during a review process. The Code does not prohibit the underwriting of an appraisal by a lender’s underwriting staff. The Code does not prohibit a lender’s due diligence in originating a loan.

Yes, a correspondent lender may use in-house appraisers if they meet the criteria in Section IV.B. of the Code.

Yes. Please refer to Qs 25 and 26.

No. A lender may order appraisals directly from an individual appraiser.

Yes, an AMC affiliated with, or that owns or is owned in whole or in part by the lender or a lender-affiliate, may order appraisals if the AMC meets the criteria of Section IV.B. of the Code.

Yes, as long as the lender has previously arranged for its appraisal process to be managed by the specifically authorized AMC. This process is compliant with the Code because the broker is not responsible for selecting, retaining, or providing for payment of compensation to the appraiser.

Yes. As stated in the answer to Q37, this process is compliant with the Code because the broker is not responsible for selecting, retaining, or providing for payment of compensation to the appraiser.

No. Such a process would give the broker an element of responsibility for selecting or retaining the appraiser, and therefore would not be compliant with the Code.

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Yes.

No. The Code does not allow a lender to accept an appraisal prepared by an appraiser that was ordered by a mortgage broker as noted in Section IIIA. of the Code.

No.

The Code prohibits brokers from ordering appraisal services, but brokers may initiate the appraisal process on a lender’s behalf in accordance with arrangements made by the lender. See Q37 for details.

No. The Code prohibits lenders from relying on an appraisal where the broker had a role in selecting, retaining, or compensating the appraiser.

Yes, a lender may accept an appraisal from a correspondent lender that complies with the Code.

Yes, a lender may accept an appraisal from a different lender that complies with the requirements of the Code and in particular Section III.A. in connection with the loan being originated. Lender A must be named as client on the appraisal report.

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No. Lender B may buy a closed loan from Lender A and sell the loan to Fannie Mae without a new appraisal if Lender B can represent and warrant that any appraisal conducted in connection with the loan conforms to the Code.

Fannie Mae will not provide a standard form. The lender is responsible for documenting the written assurance from the other lender.

The assurance must come from the original lender.

Except for the requirement that the broker may not be responsible for payment of compensation to the appraiser, the Code does not restrict how a lender obtains fees from a broker. So, for instance, a borrower may write a check to a broker, or provide their credit card information to a broker, for the broker to send to the lender or to an agent authorized by the lender.

The Code does not prohibit a borrower from providing payment to an AMC; however, the borrower may not pay the appraiser directly for an appraisal.

The underwriter or processor may communicate with an appraiser if they do not violate the requirements outlined in Section III.B of the Code.

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Yes, if a lender has reason to believe an appraiser is violating applicable laws or otherwise engaging in unethical conduct, they shall promptly refer the matter to the applicable board or agency.

The structure of the IVPI has not yet been determined and the IVPI has not yet been established. Therefore, the provisions in the Code regarding the IVPI are not yet effective.