Fighting Back Against Corrupt Appraisals

Property appraisers have been warning about it for a decade, and the real estate market is reaping the whirlwind: The home price declines around the country are partly the result of systemic, intentional overvaluations on home appraisals -- much of them at the behest of loan officers illegally influencing or threatening appraisers to get them to "hit the number" needed to close the deal.

But if an extraordinary new legal settlement has its intended effect, that system will change radically in the coming months:

• Most lenders won't be able to fund new mortgages without guaranteeing that the underlying property valuations are free of influence or pressure and fully conform to a new national quality code for appraisals.
• Appraisers and consumers will have new complaint hotlines to report any of a long list of prohibited forms of appraisal interference by loan officers, real estate agents and others.
• Lenders that have in-house appraisal staffs or that have financial interests in appraisal-management companies won't be allowed to use valuations generated by those services if they want to sell loans into the secondary mortgage market.
• Mortgage brokers, who originate an estimated 50 to 60 percent of all home loans, will be cut out of the appraiser selection process altogether.
• National oversight of home real estate appraisals will be turned over to a new body, the Independent Valuation Protection Institute, which will monitor the accuracy of home appraisals and automated valuations and receive and mediate complaints or forward them to federal and state regulators.

These and other sweeping changes are contained in a settlement among the two congressionally chartered mortgage investors -- Fannie Mae of the District and Freddie Mac of McLean -- the attorney general of New York, and the federal agency that oversees Fannie and Freddie.

The settlement terms are still open to comment from the mortgage industry and the public, but the core quality standards for appraisals already are in effect for loans delivered to Fannie Mae and Freddie Mac. The entire agreement is scheduled to take full effect Jan. 1.

Many borrowers might ask: What's the big deal here? Aren't accurate appraisals in everybody's interest and long overdue?

Absolutely. But the new agreement is unprecedented. Fannie Mae and Freddie Mac are federally regulated corporations, answerable to Congress. Normally, they don't kowtow to state governments.

But using a 1921 securities-fraud law unique to his state, New York Attorney General Andrew M. Cuomo brokered an agreement that transcends the normal reach of state governments -- one that could eventually touch almost every home mortgage transaction nationwide.