New York Attorney General Andrew M. Cuomo announced an agreement on Monday
between his office and Freddie Mac and Fannie Mae
under which the two largest purchasers of home loans will buy home mortgages
only from those lenders that meet new standards that it is hoped will ensure
independent and reliable appraisals.
The agreement which also includes the Office of Federal Housing Enterprise
Oversight (OFHEO) will create an independent organization to implement and monitor
the new appraisal standards.
Fannie Mae and Freddie Mac, which purchase roughly 60 percent of all home loans
originated in the United States, have agreed to the following:
- Establishment of the "New Home Valuation Protection Code,"
which creates requirements governing appraisal selection, solicitation, compensation,
conflicts of interest and corporate independence, among other reforms. Under
the new code mortgage brokers will be prohibited from selecting appraisers
and lenders will be prohibited from using "in-house" staff appraisers to conduct
initial appraisals or from using appraisal management companies that they
own or control.
- Beginning January 1, 2009, Fannie Mae and Freddie Mac will require that
lenders represent and warrant that appraisals related to mortgage loans originated
on or after January 1, 2009 conform to the new code or they will not be purchased.
- The new "institute" which will be funded with $24 million
from Fannie and Freddie will field complaints from appraisers who believe
that their independence has been compromised and will protect those appraisers
from retaliation. The institute will also establish a nationwide consumer
hotline to manage complaints about appraisal fraud or violations of the new
code. The institute will be funded with $24 million from Fannie Mae and Freddie
Mac and will be required to report to OFHEO and the Attorney General's office
on a regular basis.
"Today's agreement with Fannie Mae and Freddie Mac begins to set right what
had gone so horribly wrong in the mortgage industry - rampant appraisal fraud,"
said Cuomo. "The integrity of our mortgage system depends on
independent appraisals. Again and again our industry-wide investigation found
that banks were putting pressure on appraisers to drive up the value of loans
just to make a quick buck. We believe the new standards, and the new independent
monitor agreed to today, can begin to erase this problem from the industry."
"Accurate, independent appraisals are very important to ensuring the safety
and soundness of Fannie Mae and Freddie Mac and the mortgage market," said OFHEO
Director James Lockhart. "OFHEO is committed to working closely
with fellow regulators, the Attorney General, Fannie Mae, Freddie Mac, appraisers,
lenders and other market participants to assure that the roll-out of the new
code builds upon best practices, recognizes constructive comments to identify
further refinements, and avoids unintended consequences."
The new rules had been rumored late last
week but apparently OFHEO had asked for more time to consult with other
bank regulators. Reportedly Cuomo had laid down an ultimatum telling Freddie,
Fannie, and OFHEO that he wanted a deal by early this week or he would sue.