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By Aman Makkar | March 12, 2008
As many of you may know, Fannie Mae and Freddie Mac have initiated monumental changes in the appraisal ordering process. Below is the article from the Wall Street Journal.Please feel free to contact us for more information on how this change might affect you or your organization. We can be reached at 877.229.7799.
Article:
Fannie Mae, Freddie Mac Agree
To Loans That Meet New Standards
By CHAD BRAY
March 3, 2008 1:13 p.m.
Fannie Mae and Freddie Mac reached an agreement with New York Attorney General Andrew Cuomo to only purchase loans that meet new standards designed to ensure independent, reliable appraisals.
Included would be no longer buying mortgages in which the brokers selected appraisers or when lenders used “in-house” staff appraisers or appraisal-management companies they own or control.
Mr. Cuomo said the mortgage giants also have agreed to create an independent organization to implement and monitor the new appraisal standards to be funded with $24 million from Fannie and Freddie, while their regulator — the Office of Federal Housing Enterprise Oversight — also has agreed to the creation of the independent institute to be called the Independent Valuation Protection Institute. The institute will report to the attorney general’s office and OFHEO on a bi-annual basis. (See the full text of the Code of Conduct.)
The moves come amid wide sentiment that inflated appraisals have been an important contributor to the mortgage crisis. Appraisals, generally required by lenders before making home loans, are supposed to ensure that the lender has an authoritative estimate of the property’s value. An inflated appraisal can cause lenders to advance more money than a house is worth, exposing both lender and borrower to losses, especially when home prices fall.
Fannie and Freddie buy roughly 60% of all home loans originated in the U.S. and repackage them into bonds they guarantee, freeing up funds for further mortgage lending.
“With this agreement, Fannie Mae and Freddie Mac have become leaders in transforming the mortgage industry,” Mr. Cuomo said in a statement Monday. “Now national banks have a clear choice: Immediately adopt the new code and clean up appraisal fraud in the mortgage industry or stop doing business with Fannie Mae and Freddie Mac – it is that simple.”
Howard Glaser, a mortgage-industry consultant who was a senior housing official in the Clinton administration, said, “The restoration of certainty in home valuation will help restore borrower and investor confidence, which is what the mortgage market needs most right now.”
OFHEO Director James B. Lockhart said the agreements “should help restore confidence in the mortgage market by enhancing underwriting practices, reducing mortgage fraud and making home valuations more reliable.”
Mr. Cuomo’s announcement comes after his office subpoenaed Fannie and Freddie last fall for information on loans they had obtained from Washington Mutual Inc. Shortly thereafter, the companies agreed to appoint independent examiners to look at whether they had done enough to protect mortgage investors from the risks of inflated home appraisals.
Washington Mutual — which Mr. Cuomo didn’t pursue in civil litigation because it’s a chartered federal financial institution — has said it was cooperating with subsequent investigations by federal regulators into whether the company had made or improperly accounted for loans based on inflated appraisals. The company has told The Wall Street Journal that “there has been no systematic effort by WaMu to inflate home appraisals.”
Mr. Cuomo, a former housing and urban development secretary, began a probe last year into the appraisal business, which culminated in a lawsuit against the appraisal unit of First American Corp. The suit claimed the company had submitted to pressure by Washington Mutual to make sure appraisals were high enough to justify the bank’s loans. First American has denied the charges and has moved to dismiss the suit, which is pending in U.S. District Court in Manhattan.
“We believe that the appraisals were often fraudulent because there were conflicts of interest and pressures on the appraisers,” Mr. Cuomo said at a press conference Monday, referring to the alleged improper activity his probe uncovered. He said the year-old investigation — which is still ongoing — has looked into dozens of banks and resulted in the issuance of hundreds of subpoenas. He said Monday’s announcement is the only agreement his office was close to signing in the matter and declined to discuss whether agreements with other lenders were in the works.
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