Cuomo's Loan Probe Turns to Fannie, Freddie
Thursday, November 8, 2007
The New York attorney general subpoenaed mortgage finance giants Fannie Mae and Freddie Mac yesterday as he sought to expand his housing industry investigation by focusing on companies that package house loans and sell them to investors.
It was the second public step in Andrew M. Cuomo's probe of fraudulent house appraisals, which he says rippled across the market as overvalued mortgage loans were bundled together and sold as debt.
"If the appraisal process is broken, the loans and investments on which they are based may not be worth what investors have been led to believe they're worth," said Eric Corngold, an economic justice deputy who is leading the investigation for Cuomo.
At a Manhattan news conference, Cuomo said that Fannie Mae, of the District, and Freddie Mac, based in McLean, had agreed to enlist an independent examiner to analyze their risk practices and their dealings with embattled lender Washington Mutual.
WaMu, the country's biggest savings and loan, was accused by Cuomo last week of pressuring an appraisal company to inflate values of thousands of houses for sale. WaMu, based in Seattle, has denied the allegations, but its stock price plunged more than 17 percent yesterday as it remained the focus of intense regulatory and market scrutiny. The company said it had launched an internal investigation and that it "takes any allegations of improper practices seriously."
This year alone, WaMu has sold $24.7 billion in loans to Freddie Mac and $7.8 billion more to Fannie Mae, the two largest players in the mortgage financing industry. Authorities in New York also have subpoenaed several banks with substantial mortgage operations, Cuomo said, but he declined to name them.
Fannie Mae's stock dropped 10 percent, and Freddie Mac's dipped nearly 9 percent yesterday after the subpoenas were announced. Both companies, which have struggled in recent years to overcome accounting problems, shareholder lawsuits and executive turnover, said they would cooperate with Cuomo's investigation.
Created under federal charter to expand homeownership opportunities, Fannie Mae and Freddie Mac buy mortgage loans from banks, package them in bulk and sell them to investors while keeping some of the loans on their own books. Yesterday they said they had developed and adhered to standards for evaluating appraisals.
"It is against our interest to purchase or guarantee mortgages with inflated appraisals, and so it is in Fannie Mae's interest that these appraisal practices be investigated," spokesman Brian Faith said.
David Palombi, a spokesman for Freddie Mac, called accurate appraisals "fundamental" to the company's risk-management process. "We have absolutely no incentive to allow appraisers to inflate home values," he said.
The latest action by Cuomo, a Democrat who served as Housing and Urban Development secretary under President Bill Clinton, apparently ruffled the feathers of his counterparts in Washington, whom he has accused of being "asleep at the switch."
The Office of Thrift Supervision, which oversees savings and loans including WaMu, and the Office of Federal Housing Enterprise Oversight, which monitors Fannie Mae and Freddie Mac, said they had not received advance notice of the subpoenas. In news releases, each regulator stressed its role in supervising and enforcing federal regulations.
Analysts said Cuomo's ultimate goal is to boost standards for the housing industry. Already the investigation is intensifying pressure on companies to find paperwork that would justify years-old appraisals, analyst Karen Shaw Petrou of Federal Financial Analytics said in a note yesterday.
Cuomo appeared in Washington this week to support a bill sponsored by Rep. Paul E. Kanjorski (D-Pa.) that would increase penalties for lenders and brokers who lean on appraisers to inflate house values.