Cuomo Near Deal On Home Appraisals

New York Attorney General Andrew Cuomo has been investigating the causes of overvalued home appraisals for nearly a year.
New York Attorney General Andrew Cuomo has been investigating the causes of overvalued home appraisals for nearly a year. (By Stephen Lovekin -- Getty Images)
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By Carrie Johnson
Washington Post Staff Writer
Wednesday, February 27, 2008

New York Attorney General Andrew M. Cuomo is in advanced negotiations with housing finance giants Fannie Mae and Freddie Mac over a deal designed to stamp out conflicts of interest that have produced inflated mortgage appraisals, according to officials involved in the talks.

At its core, the deal would bar lending companies that sell loans to Fannie and Freddie from using preferred or internal appraisers who may be subject to pressure to overvalue properties. The deal would establish a "home valuation protection code" to set standards on compensation and independence issues, and it would create an institute with a separate board of directors to monitor complaints from consumers and appraisers, according to documents described to The Washington Post by a source not authorized to speak publicly about the issues.

If the agreement takes hold, Fannie and Freddie would no longer purchase mortgages from lenders who fail to abide by the standards, a powerful economic force that could influence the entire housing landscape.

A representative for Cuomo said yesterday that no agreement had been reached, raising the possibility that both sides could end up in court. Cuomo has clashed with federal authorities in recent months over the scope of his authority to investigate and prosecute malfeasance in the housing sector.

"At the end of the process, we will either have agreements or we will take other appropriate action," spokesman Jeffrey Lerner said. "This office prefers to pursue cooperative resolutions before litigating, and that is what we are doing here."

Cuomo has been investigating the causes of overvalued home appraisals for nearly a year, after issuing subpoenas to the Washington area home finance companies in an effort to discern how widespread the problem had become. An agreement with Fannie and Freddie could be viewed within the industry and among regulators as a gold standard that would drive other lenders to follow suit and clean up abuses in the sector.

The talks came to a head Monday, when officials from the companies met on the 25th floor of Cuomo's office in Manhattan. The companies' regulator, the Office of Federal Housing Enterprise Oversight, raised concerns yesterday afternoon about whether other federal banking overseers had been consulted about how the process would work, giving the parties pause and producing a delay, according to people briefed on the talks who have not been authorized to speak publicly.

Cuomo, a former secretary of Housing and Urban Development, agreed to give the companies a short amount of time to consider their options before deciding whether to proceed with cases against Fannie, Freddie and at least one other mortgage lender that a source identified as Countrywide Financial. A spokeswoman for the Calabasas, Calif., company did not return calls yesterday.

Last year Cuomo sued eAppraiseIT, a unit of real estate conglomerate First American, which is fighting charges that it affixed overvalued price tags on properties under pressure from one of its largest clients, Washington Mutual. WaMu said it has conducted an investigation and found "no systematic effort to inflate appraisals."

At a news conference last year involving that case, Cuomo called appraisals the "foundation of the entire housing system." Inflating appraisal values can pollute the entire process, making it more difficult for buyers to resell their properties and causing investors to lose money when the mortgage loans based on shoddy appraisals prove riskier than anticipated.

"It's very important to stress that accurate appraisals are crucial to Freddie Mac's effective credit risk management as well as to the long-term health and success of home buyers," said David Palombi, a spokesman for McLean-based Freddie Mac. "We continue to cooperate fully with the attorney general, and it's been a productive discussion."

Amy Bonitatibus, a spokeswoman for District-based Fannie Mae, declined to comment on the negotiations or the presence of chief executive Daniel H. Mudd, who traveled to New York yesterday for the four-hour meeting.

Stefanie Mullin, a spokeswoman for OFHEO, said the agency is involved in the discussions and is working to "reach a constructive approach."

The proposed agreement, which could take hold as early as September, is "an attempt to restore stability to one piece of the market that isn't working," said Howard Glaser, a District-based housing consultant who has represented Fannie and Freddie and who worked alongside Cuomo at HUD.

"Anything that encourages an independent appraisal process I think is a good thing for the public," said Terry Dunkin of the Appraisal Institute, the largest professional organization for home appraisers. "Continued diligence on this is the order of the day."

Faulty appraisals have been the focus of legislative and administrative interest in recent months. The House of Representatives approved a subprime mortgage lending bill that includes proposals to prohibit coercion of appraisers. The entire Senate has not acted. The Federal Reserve Board, meanwhile, proposed new rules in December to protect consumers against inflated appraisals and improve mortgage lending practices.

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