Cuomo cuts deal with Fannie and Freddie

New York attorney general settles investigation into home appraisal inflation with lenders Fannie Mae and Freddie Mac.

March 3 2008: 3:00 PM EST

ALBANY, N.Y. (AP) -- New York Attorney General Andrew Cuomo said Monday that prospective home buyers will be protected from fraudulently inflated home prices under a new agreement with government-sponsored lenders Fannie Mae and Freddie Mac.

Cuomo said lenders have pressured appraisers to bump up the listed value of homes, contributing to a national mortgage crisis that is forcing families into foreclosure.

Under the agreement, which ends Cuomo's investigation into the two companies, lenders won't be allowed to use in-house staff for initial appraisals and will be prohibited from using appraisal management companies that they own or control.

Fannie Mae and Freddie Mac purchase nearly 80% of all home loans originated in the United States, Cuomo said in a phone interview.

"We believe the appraisals were often fraudulent because of a conflict of interest and pressure on the appraisers," Cuomo said. "To us, this issue was a pervasive issue that needed to be solved."

The companies acknowledged no wrongdoing, and said the agreement will benefit everyone.

Reliable appraisals "We are pleased to work with regulators to do our part to ensure sound, accurate, independent and reliable appraisals," Fannie Mae General Counsel Beth Wilkinson said in a prepared statement.

She said Fannie Mae will make sure appraisals are independent and that home valuations are accurate under the Home Valuation Protection Code.

The companies will require all lenders to conform with the code beginning in 2009.

"It's going to create massive change," said Brian Chappelle, a partner at Potomac Partners in Washington, D.C., a consulting firm to the mortgage industry.

He said mortgage lenders that own appraisal companies -- such as Wells Fargo & Co. and Countrywide Financial Corp. -- may have to spin off those divisions because of new prohibitions against in-house appraisals.

Fannie Mae and Freddie Mac will pay $24 million to create an institute that will monitor adherence to the valuation code.

"These initiatives clearly serve the interests of the nation's homebuyers, the housing markets and the broader economy," said Robert Bostrom, Freddie Mac's general counsel.

A nationwide hot line will be set up for consumers who suspect fraudulent appraisals or fraud. Appraisers who feel pressure to pad valuations can also contact the institute, under the agreement.

The institute will report every six months to the attorney general and the Office of Federal Housing Enterprise Oversight -- the federal office that regulates Fannie Mae and Freddie Mac.

Cuomo has been investigating billions in home loans that Fannie and Freddie bought from banks, including the largest U.S. savings and loan, Washington Mutual Inc.

"I believe consumer confidence should be restored," Cuomo said. "With these reforms we will have a safer, better evaluation process."

In November, after Cuomo issued subpoenas to Fannie Mae (FNM) and Freddie Mac (FMC), Federal Housing Enterprise Oversight Director James Lockhart accused Cuomo of overstating the risks the two government-sponsored companies faced from faulty home appraisals. Lockhart objected to Cuomo's suggesting that Fannie and Freddie could no longer afford to continue buying mortgages from Washington Mutual (WM, Fortune 500) unless they could verify that the loans were based on trustworthy appraisals.

Lockhart, who has often criticized Fannie and Freddie as they have recovered from multibillion-dollar accounting scandals in recent years, said the companies don't have an incentive to knowingly buy mortgages with inflated appraisals. Unlike other companies that issue mortgage-backed securities, they retain the credit risk on the underlying mortgages by guaranteeing repayment to holders of the securities.