The Five Fronts of the HVCC War

For perhaps the first time since the S & L crisis of the 1980’s, appraisers are faced with an alphabet soup of proposed regulations which will dramatically and permanently alter the valuation industry landscape.  But unlike the S & L crisis, appraisers and others are forming political, legal, and business assault teams and preparing for a long, painful fight over the HVCC, as well as other real estate reform bills.

Opening moves
The HVCC, or Home Valuation Code of Conduct, isn’t a regulation at all, but rather a privately negotiated set of policies promulgated by Fannie Mae and Freddie Mac.  It originates not from a federal agency or from Congress directly, but from action started by the New York Attorney General against a lender (Washington Mutual) and a management company (eAppraiseIT), finally escalating into an investigation of Fannie and Freddie directly.  In order to stop the investigation into their practices, the GSEs signed a  settlement agreement with New York’s Attorney General, Andrew Cuomo, agreeing to create new rules which they would embody in the HVCC.  At the last minute, the Office of Federal Housing Enterprise Oversight joined in and signed the settlement, which granted it federal rule status. 

After first announcing that there would be 90 days to comment on the proposed new rule, OFHEO reduced the time period to 45 days, ending April 30th. But even in that short time, opposition to the HVCC was galvanized. We formed this newspaper and began a series of e-mail and print campaigns, culminating in the submission via our website of more than 31,000 comments of opposition to OFHEO, Fannie, Freddie, and the New York Attorney General's office. Simultaneously, we hired lobbyists and PR firms in Washington and began working the traditional political process in the capital. While we can't report specifically on most of the meetings and discussions held in that venue, we can say that the one-two punch of grassroots and corporate advocacy is effective.

As appraisers saw us acting more like an organization and less like just a software vendor, many became more vocal with their organizations, asking not only why we were carrying the torch, but why the organizations had endorsed the HVCC in the first place. By the time the OFHEO comment period ended, the appraisal organizations had effectively reversed their stances and submitted commentary much more critical of the HVCC than their prior endorsements.

Forming five battle lines
With the stage set, it's clear that the battle lines regarding the HVCC and industry reform in general are forming along five primary fronts:

  1. Getting the parties to the agreement to make changes to the HVCC directly
  2. Using congressional action to supersede the HVCC with like-minded but less damaging real estate reform legislation
  3. Stopping the HVCC entirely through private litigation in the courts
  4. Forcing modification to the HVCC's scope via other agencies
  5. Altering business models to mitigate the HVCC's negative effects

We'll examine each area separately here, with more to follow online and in subsequent issues of this paper.

Changing the HVCC itself
The only way to change the HVCC directly at this point is to get the parties - OFHEO, the NY AG, Fannie, and Freddie - to change it themselves through basic logical persuasion. Each party comes to the table with different motivations, so getting all to agree on a change is difficult at best.

Ultimately, it appears that the NY AG holds most of the cards in terms of forcing any alterations, since Fannie and Freddie don't want a tobacco-like state damages lawsuit opened back up and OFHEO needed to be involved because their federal territory was being successfully invaded by a state. It's likely that Fannie and Freddie were afraid they would either lose in court or would have to negotiate substantial financial settlements had they not handled the lawsuit in this manner. The current arrangement gives Cuomo political advantages while shifting the costs away from Fannie and Freddie directly and keeping OFHEO relevant. That being said, it appears that Cuomo's office is genuinely seeking to solve a real problem, not just derive political benefit.

While some groups have visited with Cuomo's staff, OFHEO, and others, it's generally safe to say that if the content of a meeting can be reported publicly in detail, it's a sure sign that it won't change anything. Effectively influencing cases like this happens in off-the-record meetings which don't cause the parties to spend any "political currency". If you hear about it, it didn't cost much.

Fighting in Congress
Congressional real estate action is generally centered on the "Federal Housing Financing Regulatory Reform Act of 2008", which is currently controlled by the Senate Finance Committee. Elizabeth Dole, R (NC) is working to incorporate an amendment regarding the HVCC, instructing OFHEO to issue new rules consistent with other federal regulations and superseding the HVCC. Dole's amendment was not heard in committee due to a procedural stalling tactic not aimed at the amendment directly, but she plans to bring it to the floor of the Senate.

Appraisers should ask their Senators to support the amendment, and their Representatives should be encouraged as well to support its provisions when it reaches conference with the House. As noted in the political action articles on pages 6 and 7, Congress is preparing for the July 4th break, and after that they'll be in campaign mode due to the presidential election, so the time to affect the outcome through Congress is short. There is talk of fast tracking the housing bill and working directly with the House before it even comes up for Senate vote, which means the need to act now is even greater. Our articles on pages 4 and 5, regarding the economic impact of the HVCC and the political action website which we've deployed (at, give detailed information on how to proceed.

The likelihood of litigation
The HVCC was born out of a lawsuit and may indeed end with one or more lawsuits as well. Due in large part to OFHEO's involvement, the HVCC falls under the purview of the Administrative Procedures Act (or "APA"), which requires specific procedures for commentary and public involvement when rules are set forth by federal agencies.

Virtually every letter submitted by banking associations, federal agencies, and major corporations (including, of course, our own letter) during the abnormally short commentary period cited the APA conflict and explicitly reserved the right to sue under the APA.

While Fannie's and Freddie's public stance is that the HVCC is part of a private settlement that doesn't invoke the APA, the generally accepted opinion is that a lawsuit based on APA violations would be filed and heard, though even a successful APA challenge might simply delay the HVCC without altering it.

Turf battles with other agencies
With a state attorney general demanding that a federal agency overseeing the GSEs expand its scope to include the internal policies and structures of national banks, it was inevitable that the banking-related federal agencies would respond negatively.

Indeed, the most scathing criticism to date came from the Office of the Comptroller of the Currency (OCC), John Dugan. Using a word we too applied in our own political action messages - "draconian," - Dugan's letter called on OFHEO to withdraw the HVCC entirely and work in manners consistent with existing federal procedures. Dugan also cited the APA violations.

Political maneuvering behind the scenes by the other agencies in Congress and the administration may result in a face-saving way for OFHEO to be barred from implementing the HVCC.

Fighting with new business models
There's one final area where the battle will be fought with dollars and ideas every day: In the industry itself. New business models will arise which defend against the challenges posed by the HVCC, in the context of the broader scramble to survive a massive real estate meltdown.

The post-bust liability environment (and the need for lenders to move now to be in compliance by January 1st just in case the HVCC succeeds) will shift most lenders toward a "firewall" structure. Some will move to traditional AMCs and hand off all liability. Some will create internal compliance departments which prevent loan production staff from influencing appraisers, while still using their own in-house managed fee panel. Others will choose a hybrid model, where an external service provides the technical firewall shielding appraisers from loan production staff, but without requiring a management company's fee split and without the extra cost of a new internal compliance staff.

Likewise, appraisers may form "co-op" arrangements, consolidate into larger corporate entities, or even create full-fledged regional and national AMCs. Others will simply work for AMCs at lower fee splits, and still others will leave the business entirely.

Winning the battles, without losing the war
It's happened on many occasions that a military force has won nearly every battle, yet lost the war. Even if appraisers manage to muster the forces to prevail in all five areas examined here, it's essential that the final objective for "winning" be kept in mind: Appraisers must be financially successful. Focus all of your energy on that end result, and this will wind up being a worthwhile fight. Ignore it, and it won't matter.

Editor's Note:  We've written extensively about the HVCC and its effect on the industry.  Related articles include can be found here.