Rates Roller Coaster Ride & Discussing FHFA's HVCC Comments

Last week was a roller coaster ride for mortgage rate watchers.  After a nice rally in the mortgage-backed securities market on Tuesday, the par 30 year fixed mortgage rate moved below 5.00% on Wednesday, however by Friday Treasuries and MBS prices had fallen back to Monday 's levels and mortgage rates consequently moved higher. This has been a consistent pattern lately, each time mortgage rates break the 5.00% barrier, they fail to remain below 5.00%.  This implies, if you are considering a refinance and have yet to submit a loan application...you should do so to ensure that you are able to take advantage of the periods of mortgage rates below 5.00% (assuming you qualify).

The Home Valuation Code of Conduct has been a thorn in the side of many mortgage originators, real estate agents...and borrowers. Last week,the Federal Home Finance Agency published some clarifications regarding our HVCC "misconceptions"

Here's what they had to say:

"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."

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.

I am not sure how I feel about how the FHFA worded their press release, specifically:

"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"

From Freddie Mac HVCC FAQ:

Are lenders permitted to use appraisers who have been selected or retained by a mortgage broker or real estate agent?
No. The Code specifically prohibits lenders from accepting appraisal reports completed by an appraiser selected, retained or compensated in any manner by mortgage brokers and real estate agents

So HVCC is not to blame for deals I have lost due to poor valuations from AMC appraisers? HVCC is not to blame for brokers having to use AMCs? Who is to blame? Is it the broker's fault just because they are a broker?

Following this press release, Fannie Mae and Freddie Mac published new FAQ's to help cleap up some of the confusion regarding the GSE's application of HVCC guidelines. Here are a few updated from  FANNIE MAE's FAQ and FREDDIE MAC's FAQ

The Code requires the lender to provide the borrower a copy of any appraisal report concerning the borrower’s subject property promptly upon completion. In this instance, what is meant by “completion”?
The word “completion” is meant to reflect when the lender has reviewed and accepted the appraisal to include any changes or corrections required.

How do lenders determine the correct process for selecting an appraiser?
Sellers must comply with the following requirements related to the selection of an appraiser:

• Sellers must select appraisers in compliance with the terms of the Code
• Appraisers must be certified or licensed in the state in which the property is located, and must be eligible to perform appraisals in that state
• Appraisers must be familiar with the local market in which the property is located, must be competent to appraise the subject property type, and must have access to the data sources needed to develop a credible appraisal

Are processors, closers, secondary marketing employees, underwriters, etc. permitted to order appraisals if they do not receive commission or incentives to close loans, but they ultimately report up to a senior-level employee who is responsible for loan production?
The Code states that members of the lender’s loan production staff who are compensated on a commission basis or who report to any officer of the lender not independent of the loan production staff and process are not permitted to order appraisals or influence the selection of appraisers. Ideally, a Seller should establish complete separation of appraisal activities from loan production activities. At an absolute minimum, the degree of separation should be no less than one level up in the reporting structure. To mitigate any potential conflict of interest due to reporting relationships, Sellers should establish, maintain, and enforce written policies and procedures that are designed to reinforce independence

Does the Code change any of Fannie Mae’s requirements regarding the role of the appraiser?
No. The Selling Guide requirements for the appraiser remain at their same high level. Fannie Mae requires the appraiser to provide complete and accurate reports; to report neighborhood and property conditions in factual and specific terms; to be impartial and specific in describing favorable or unfavorable factors; and to avoid the use of subjective, racial, or stereotypical terms, phrases, or comments in the appraisal report. The opinion of market value must represent the appraiser’s professional conclusion, based on market data, logical analysis, and judgment.

Additionally, it is important to note that when an appraiser signs Fannie Mae’s residential appraisal report form, the appraiser is also certifying the following:

“I have knowledge and experience in appraising this type of property in this market area.”
And
“I am aware of, and have access to, the necessary and appropriate public and private data sources, such as multiple listing services, tax assessment records, public land records, and other such data sources for the area in which the property is located.

Does the Code prohibit appraisers from reviewing reconsideration of value requests?
No. Reconsideration of value requests that are based on correcting objective, factual errors (such as incorrect square footage, incorrect number of rooms, etc.) are permissible under the Code.

Who on the lender's staff, or on the staff of an authorized third party, may have communications with an appraiser relating to or having an impact on valuation, including ordering or managing an appraisal assignment?
Anyone who is not part of loan production staff or who is not compensated on a commission basis upon successful completion of a loan or anyone who does not report, ultimately, to any officer of the lender not independent of the loan production staff or process, may have communications with an appraiser relating to or having an impact on valuation, including ordering or managing an appraisal assignment.

Does the Code prohibit the appraiser from talking with the Realtor involved in the subject transaction? Can the Realtor provide comparable data and/or explain their pricing strategy to the appraiser?
The Code does not prohibit the appraiser from talking with the Realtor; Realtors can often be a source of data in the market in which the subject property is located. Any data provided by a third party

Does the Code require lenders to select appraisers on a rotational basis to perform appraisals?
No. Lenders may choose to use a rotating roster of appraisers, but this is not a requirement of the Code.

Does the Code prohibit the use of foreclosures as comparable sales?
No. The Code does not address the use of foreclosures as comparable sales nor does Freddie Mac require appraisers to use Real Estate Owned (REO), foreclosures, or short sales as comparables sales. However, if the appraiser determines that REOs, foreclosures, or short sales are representative of the properties available to typical purchasers for the market in which the property is located, appraisers must consider their use.

NAR thought these updates were a good step in the right direction but they also stated that...

"NAR has asked Congress and the FHFA to immediately implement an 18-month moratorium on the new HVCC rules to further address unintended consequences of this new rule. We will continue to push for this, but are pleased that this first step was taken today.”

I suppose slow and steady progress is better than no progress at all ?

So far today, MBS prices are lower but slowly moving back towards flat on the day. Treasuries are the driving force behind lower MBS prices with the benchmark 10 year note yield rising to an intraday high of 3.76 before falling back to 3.72.   If you  recall, on Wednesday, the 10 yr TSY note was trading well under 3.48%.  Rising benchmark yields today are a result of record Treasury debt auctions this week.   Since MBS and treasuries are both a fixed income investment, they tend to move in ssame direction,  so because Treasuries are selling off, MBS prices have been pressured lower too. 

HERE is a recap of what will move markets in the week ahead.

Reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 5.25% to 5.375% range for the best qualified consumers.  In order to meet the criteria of best qualified you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.  

Thoughts on the HVCC updates?