washingtonpost.com > Business > Local Business
» This Story:Read +|Talk +| Comments

Fannie, Freddie Agree to Tighten Appraisal Rules

Andrew Cuomo is trying to crack down on inflated home appraisals.
Andrew Cuomo is trying to crack down on inflated home appraisals. (Ramin Talaie - Bloomberg News)
  Enlarge Photo    

Network News

X Profile
View More Activity
By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, March 4, 2008

Fannie Mae and Freddie Mac, linchpins of the nation's mortgage system, yesterday promised to crack down on inflated home appraisals, which can take a toll on borrowers, lenders and mortgage investors.

This Story
View All Items in This Story
View Only Top Items in This Story

The government-sponsored companies agreed to hold their customers to a new code of conduct, and in return, New York Attorney General Andrew M. Cuomo dropped a nearly year-long investigation of their appraisals. Both companies denied wrongdoing.

"With these reforms, we will have a safer, better valuation process," Cuomo said.

Home appraisals determine how much money lenders can lend against a property. If an appraisal is inflated, the borrower may end up borrowing more money than the home is worth, the lender's collateral may be insufficient to cover the debt, and homeowners may be charged too much in property taxes.

Inflated appraisals can contribute to market bubbles and compound the losses when bubbles burst.

Appraisers have long complained that they are pressured by real estate agents, mortgage brokers and loan officers to deliver the desired numbers. Even when there is no overt pressure, there can be potential conflicts. Appraisers often depend on referrals from people involved in real estate transactions -- people who may collect fees or commissions only if the appraisal supports a proposed transaction and the deal goes through. Some lending institutions have their own appraisers.

"We believe that the appraisals were often fraudulent because there were conflicts of interest and pressures on the appraisers," Cuomo, who was secretary of housing in the Clinton administration, said at a New York news conference.

The code of conduct unveiled yesterday would prohibit lenders from trying to influence appraisals. For example, they could not promise future business or threaten to withhold business. Nor could they use appraisal companies in which they have more than a 20 percent ownership stake.

Lenders would continue to choose and pay appraisers, but employees involved in the lending process would be barred from dealing with the appraisers. Appraisers still could be given copies of documents that would show them the proposed sale price.

The code would apply only to lenders doing business with District-based Fannie Mae and McLean-based Freddie Mac, but Cuomo said he expected others in the industry to follow their example.

Fannie Mae and Freddie Mac also agreed to fund an institute to monitor home appraisals and field complaints from consumers and appraisers.

Fannie Mae and Freddie Mac, which were chartered by the government to support the housing market, package mortgages into securities for sale to investors and earn fees for guaranteeing to pay the loans if the borrowers default. The two companies also buy mortgages and mortgage-backed securities for their own investment portfolios.


CONTINUED     1        >

» This Story:Read +|Talk +| Comments
© 2008 The Washington Post Company

Network News

X My Profile
View More Activity