Bloomberg News reported on Wednesday that Fannie Mae is proposing
to ban the use of appraisals by a lender's employees or those
arranged by mortgage brokers.
The proposal was contained in what Bloomberg referred to as a "talking
points" memo distributed to lenders this week and was in response to an
investigation of the mortgage industry by New York Attorney General Andrew Cuomo.
In November the AG filed suit against 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.
WaMu was not included in the original suit but Cuomo demanded that Freddie
Mac and Fannie Mae each appoint an Independent Examiner to review mortgages
and the underlying appraisals that the two GSEs have purchased with particular
emphasis on those purchased from WaMu.
According to the Bloomberg article, the memo was part of an on-going effort
by Fannie Mae to cooperate in the Cuomo probe.
The proposed change would mean that Fannie Mae would no longer authorize
its lending partners to use appraisers employed by a wholly owned subsidiary
and, while we have not seen the memo, apparently it contains reference to the
eventual establishment of an appraisal clearinghouse which we assume would assign
appraisers to a project.
Bloomberg quotes Jonathan Miller of a New York appraisal company Miller Samuel,
Inc. as saying that about three quarters of residential mortgage appraisals
are arranged through brokers who only get paid if a loan closes. Miller called
the practice "laughable" because it creates a financial incentive
for mortgage brokers to push appraisers toward higher valuations. Higher appraisals
also mean more homeowners qualify to refinance their homes and take cash out,
The appraisers themselves have long urged that appraisers be required to keep
arms-length from the lenders. Many complain that honest appraisers who refuse
to match the values that the lenders want soon find them selves without work
and that they are frequently pressured by the loan officers who assigned them
to a project to raise their values.
The proposed restrictions would apply to loans acquired after Sept.
1, according to the memo.