Albert Einstein once said that everything should be made as simple as possible, but no simpler. That seems to mean that simplicity is good, but not to the point that we're sacrificing effectiveness in the quest to make things easy. It's good practice to make things as simple as possible, but not when you cut so much out of the process that the purpose is defeated.
It's too bad that Einstein isn't around to help us make sense of the Home Valuation Code of Conduct (HVCC). This new code is complicated enough in and of itself. But when you factor in the numerous rumors and misconceptions that are spreading like wildfire through the industry, deciphering how to achieve HVCC compliance can be downright confusing.
For those who are out of the loop, here is a breakdown of the situation. The HVCC is a set of guidelines that dictate how lenders', brokers' and appraisers' actions in the appraisal process must be conducted. The code was adopted by Fannie Mae and Freddie Mac in an effort to ensure integrity in the appraisal process, and it has been in effect since May 1.
Lenders and brokers who do not comply with the HVCC could be left with loans that neither Fannie Mae nor Freddie Mac will accept – and that, of course, creates a strain on warehouse lines and on overall costs. And, of course, if a loan is found to be in violation of the HVCC after the loan has been guaranteed by Fannie or Freddie, lenders and brokers could be faced with a buyback.
The HVCC seems like it should be pretty straightforward. But, as it turns out, there's a bit of vague language in the code that leaves it wide open to interpretation. In an effort to simplify HVCC compliance, many in the industry have begun suggesting inaccurate ‘solutions’ that, in effect, detract from the effectiveness of lenders' and brokers' business practices.
To add to the problem, with the speed of information transfer enabled by the Internet, these fallacies and partial truths are quickly becoming adopted as fact by many lenders and brokers, who are now inadvertently sacrificing effectiveness in the quest for simplicity.Â
Outsourcing or not?
One of the primary misconceptions about the HVCC is that lenders and brokers must use an appraisal management company (AMC) in order to be compliant. In theory, that seems like a great way to simplify all of the complex language in the code. Rather than deciphering the intricate language in the guidelines, lenders can just pass the task on to an AMC, which can figure out the details and ensure that the lender or broker stays in compliance.Â
Well, here's the rub: While using an AMC may seem to simplify the process, it just might be taking simplification into Einstein's dreaded realm of making things a little too simple – this time, at the cost of effectiveness and, therefore, to your bottom line risk and potential costs.
The truth is, using an AMC is not mandatory, nor will it ensure HVCC compliance. Think about it this way: If an AMC fails to comply with HVCC guidelines, it's the broker or lender that will be held responsible, not the AMC. You can outsource tasks, but you can't outsource responsibility.
And if it does come down to handling a buyback, chances are that an AMC will not have the reserves to cover the cost of a buyback. Ultimately, it's the originating body that will have to foot the bill.Â
There's a lot more to HVCC compliance than simply keeping any parties that could benefit from tampering with the transaction from influencing the outcome of an appraisal. There are also stipulations that mandate that the borrower receive a copy of the appraisal no later than three days before closing and that transfer of the appraisal be compliant with HVCC guidelines.Â
Lenders are also required to quality-control test a randomly selected 10% sample of appraisal reports or valuations used by the lender and to report any adverse findings, including noncompliance of the code – to Freddie Mac or Fannie Mae if any of those loans are found to be noncompliant. These are just a few of the niggling little details that can result in code violation.
So how do lenders and brokers safeguard themselves against violating any of the little details of the HVCC, while still keeping things simple? Instead of outsourcing, things could be simpler by keeping the HVCC tasks in-house. Appraisal management technology enables lenders and brokers a level of objectivity that only a computer's random selection can provide, while also allowing for quick access to pertinent and non-subjective information (i.e., continual tracking of appraiser licensing and certifications).
Beyond the obvious issue of liability, why would an appraisal management technology offer a better choice than going directly to an AMC? One of the big differences between going straight to an AMC and using an appraisal management technology is that lenders and brokers maintain the control and oversight of their processes, ensuring that everything is done in compliance not only with the HVCC, but also with their own business protocol.
Lenders and brokers can control which approved appraisers complete their appraisals, so they can still rely on established relationships and use the professionals they trust.
The truth is, when a lender makes the switch to an AMC, loan originators and borrowers are often the ones that suffer. Because there's no control in selecting the level of expertise of the appraiser with an AMC, appraisal turnaround times tend to get longer, while the quality of the appraisal gets lower, as appraisals can be designated to less-experienced appraisers. Plus, appraisal costs are often higher, so the borrower is saddled with one more cost.
Another advantage of using an appraisal management technology is that you get an auditable electronic paper trail of all communications, so management cannot only see who touched the transaction and where possible weaknesses are located, but also demonstrate their compliance should questions arise in the future.
Moreover, these systems are designed with personnel restrictions for certain actions, so you can be sure that restricted parties don't violate guidelines, even if they want to.
Let's be clear that this is not a broad slam that all AMCs are untrustworthy. Far from it – there are many honest professionals working today whose credentials are not questioned. But trusting someone else to protect your interests is a lot different than protecting them yourself.
At the end of the day, it is your business that is impacted. When it comes to choosing how you'll achieve HVCC compliance, it comes down to deciding whether you want simplicity at the cost of efficiency, or simplicity merged with the protection of best practices.
Vladimir Bien-Aime is president of Global Data Management Systems LLC, based in Landsdale, Pa. He can be reached at (877) 693-8722.
