By Kenneth R. Harney
Saturday, March 15, 2008

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.

Late last year, Cuomo began an investigation of potential appraisal fraud in the portfolios of Fannie Mae and Freddie Mac. With what he considered to be evidence of appraisal problems generated by a separate suit involving a major seller of loans to Fannie and Freddie -- Washington Mutual -- Cuomo began negotiations with the two companies and their federal regulator, the Office of Federal Housing Enterprise Oversight.

Cuomo never announced what, if anything, he found amiss at Fannie Mae and Freddie Mac. In the settlement agreement, both companies denied any wrongdoing. First American's eAppraiseIT subsidiary, accused by Cuomo of inflating appraisals under pressure from Washington Mutual, also denied wrongdoing, as did Washington Mutual.

Whatever the causes, Fannie Mae and Freddie Mac agreed to overhaul their appraisal standards and practices, signed on to a detailed home-valuation code of conduct covering all their mortgage activities, and committed to pay $24 million over the next five years to create and staff the independent institute that will oversee appraisals nationwide.

Federal banking regulators are expected to adopt parallel reforms, effectively extending the agreement's reach far beyond Fannie Mae and Freddie Mac to banks, thrift institutions and credit unions.

Mortgage brokers are incensed at what they consider unfair treatment in the settlement, as are some large lenders with financial interests in appraisal management firms.

Roy DeLoach, executive vice president of the 25,000-member National Association of Mortgage Brokers, said the group is exploring legal action. The brokers maintain that the settlement, which DeLoach said amounts to "a de facto regulatory action by OFHEO," failed to follow federal procedural rules.

DeLoach also said he wants the settlement parties to reveal the findings of the investigations into Fannie Mae and Freddie Mac. "What did Cuomo find? How does it relate to brokers? Have they gone after appraisers who submitted inflated valuations? Those are the real questions here," he said.

Absent a federal court order, don't count on answers to these questions soon from any of the parties to the settlement. In the meantime, a new era of independent, better appraisals just might be over the horizon.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.