Important Information about Home Valuation Code of Conduct
March 3, 2008 Advisory Email Message to Seller/Servicers

On March 3, Freddie Mac announced that we would join with the New York State Attorney General and our regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), to implement the Home Valuation Code of Conduct. We share the New York State Attorney General's goal of enhancing the independence of appraisers to protect the integrity of the appraisal process. To accomplish this on an industry-wide level, with the guidance and at the direction of our regulator, OFHEO, we joined with OFHEO and the New York Attorney General in this agreement to implement and require Freddie Mac Seller/Servicers to adopt the Home Valuation Code of Conduct.

In addition, we will be working with these and other industry participants, including Fannie Mae, to establish and fund the Independent Valuation Protection Institute, an independent entity that will be established to develop, implement, monitor and study the integrity of home valuation processes.

The agreement signed on March 3 includes terms that essentially require, among other things, that the appraisal process be independent from the lender in all respects. As a result:

• A lender will no longer be allowed to sell Freddie Mac a loan if the appraisal was done by an in-house appraiser, a subsidiary or affiliate of the lender (except under certain conditions as noted below), ordered by a mortgage broker, or an entity that offers any other services other than appraisals.
• Beginning January 1, 2009, Freddie Mac will require that lenders represent and warrant that appraisals prepared in connection with mortgages originated on and after January 1, 2009 conform to the Code, and that the appraisal report was obtained in a manner consistent with the Code.
• After January 1, 2009 we will no longer purchase mortgages from originators that do not agree to adopt the Code with respect to loans that are delivered to Freddie Mac.

It is important that you review this document in full, as it includes additional details and responsibilities for lenders, including:

• Prohibiting lenders and third parties from influencing the development or result of an appraisal.
• Prohibiting the sale of mortgages to Freddie Mac where there is use of appraisal reports in underwriting prepared by the lender, an affiliate of the lender, a parent company or subsidiary company of the lender, an entity that is owned in whole or in part by the lender, a real estate settlement services provider or an entity owned in whole or part by a settlement services provider. Lenders may use in-house staff appraisers to order appraisals, conduct pre- and post-funding appraisal reviews and quality control, develop, deploy or use internal automated valuation models, and prepare appraisals for non-origination transactions, such as loan workouts. Lenders cannot use any appraisal report obtained through their own or affiliated appraisal management company, except where the lender:
  • Has an ownership interest of 20% or less
  • Has no involvement in the day-to-day operations of the appraisal management company, and the company operates independently
  • Has no role in the selection of individual appraisers or panel of appraisers used by the appraisal management company
• Requiring lenders to ensure that borrowers are provided a free copy of the appraisal report immediately upon completion, and no less than three days before the borrower's closing. Borrowers may waive this three-day requirement, and lenders may require borrowers to reimburse them for the cost of the appraisal.
• Requiring lenders or a third-party specifically authorized by the lender (including appraisal management companies and correspondent lenders) to be responsible for selecting, retaining and providing for payment of all compensation to the appraiser. Lenders will be prohibited from accepting appraisal reports completed by an appraiser selected, retained or compensated by any other third party, including mortgage brokers and real estate agents.
• Requiring absolute lines of independence within a lender's organization for the selection and management of appraisers for appraisal assignments and communication with the appraiser and:
  • Requiring employees of appraisal management companies tasked with selecting appraisers to be appropriately trained and qualified in the area of real estate and appraisals*
  • Requiring lenders to clearly demonstrate safeguards to isolate collateral evaluation from influencing loan production processes when absolute lines of independence cannot be achieved as a result of the lender's small size or limited staff
• Requiring lenders to establish and distribute telephone hotlines and email addresses to receive any complaints from appraisers, individuals or any other entities related to improperly influencing appraisers or the appraisal process, and requiring a follow-up investigation of those hotline calls. This includes requiring lenders to notify borrowers of the telephone and email addresses as part of the cover letter of their appraisal. The hotline and email address shall be attended only by a member of the Office of the General Counsel, Chief Compliance Officer or other independent officer.
• Requiring lenders to perform a quality control review of a randomly selected 10 percent (or other statistically significant percentage) of the appraisals, valuations or evaluations that are used by the lender, including the results of automated valuation models, brokers price opinions or "desktop" evaluations. Lenders must report the results of quality control testing to the Independent Valuation Protection Institute.
• Requiring lenders to report illegal or unethical conduct by appraisers to the Independent Valuation Institute and state certifying and licensing agency.
• Requiring lenders to warrant that the appraisal report was obtained in accordance with the Code of Conduct.

The agreement signed by Freddie Mac allows for the initiation of a comment period during which we will collect and report back to OFHEO information and comments submitted by Freddie Mac Seller/Servicers. We will notify you shortly on the specific details of this comment period, and how and when you should submit information to Freddie Mac.

We recognize that implementing the Home Valuation Code of Conduct will require significant changes in appraisal practices and operational requirements for Freddie Mac Seller/Servicers, and may require a change in some lenders' business models. We have not yet determined the operational, systems and applicable Single-Family Seller/Servicer Guide changes that will be necessary to implement the Code, but will work with you to do so as efficiently and with as little disruption as possible. We will communicate specific changes, and add greater clarity where needed, when available. In the meantime, should you have immediate questions, please contact your Freddie Mac Account Manager or representative.

*In our March 3 Single-Family Advisory email to customers, we incorrectly stated that employees tasked with selecting appraisers were required to be licensed and certified appraisers.