James B. Lockhart, III, Director of the Office of Federal Housing Enterprise Oversight (OFHEO) took the New York State Attorney General to task Thursday for involving Freddie Mac and Fannie Mae in his investigation of subprime lending.

OFHEO is, of course, the Federal agency charged with regulating the two government sponsored enterprises (GSEs) and, with all of the internal problems the two Corporations have had in the last three years, what was a "nowhere" political appointment for Lockhart has become a highly visible and moderately influential position.

As we have reported here twice in the last week, Attorney General Andrew Cuomo has filed suit against a First American, parent company of one of the country's largest appraisal management companies, charging them with folding under pressure from Washington Mutual, a major client, to use only those appraisers that provided property values acceptable to WaMu.

On November 8 Lockhart fired off a letter to Cuomo which may be the best example of how to chasten and shrink an opponent since Cyrano DeBergerac taught the course. First he patiently reminded Cuomo, former Secretary of the Department of Housing and Urban Development of the role of OFHEO as the federal safety and soundness regulator of Freddie Mac and Fannie Mae.

Lockhart then went on to say that, after reviewing the letters and subpoenas sent to the GSEs, he felt that "you and your staff may not fully understand the differences between the mortgage-backed securities (MBS) issued by the GSEs and those issued by other entities." The lesson then followed: "unlike the issuers of private label MBS," Fannie and Freddie retain the credit risk by guaranteeing repayment to purchasers of MBS. "Consequently, they have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals." Lockhart said that the two firms have programs in place to prevent this and other kinds of mortgage fraud and have been actively working with OFHEO to improve these safeguards.

The Direct said he was disappointed that Cuomo had not contacted OFHEO before or even after subpoenaing the GSEs because of their mutual goals of ensuring that fraud is not perpetrated on mortgage borrowers or on market participants. He then suggested that OFHEO and the AG's office need to meet and discuss several issues including the following:

• The GSE's efforts to prevent appraisal fraud and OFHEO's oversight of that activity;
  
• Cuomo's demand that "two-federally-chartered and federally-regulated Enterprises cease doing business with a major federally-chartered bank, which you have not charged or subpoenaed, unless certain conditions stipulated by you are met." (In other words, Mr. Cuomo, you are a state official, quit messing around in the federal sandbox.)
  
• The scope, authority and supervision of the independent examiner, "which we will also be discussing with the Enterprises."

This is likely to be an interesting turf fight. Andrew Cuomo, son of former NY Governor Mario and very ex-spouse of one of Robert Kennedy's kids, was not known in his Washington days for his ability to cooperate or compromise. Lockhart, in addition to his talent with the written word, has one more thing on his side - this really is not a state matter.