Fannie, Freddie Cut Deal With Cuomo on Appraisals
Wednesday, December 24, 2008
Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, reached a new agreement with New York Attorney General Andrew Cuomo to ensure independent home appraisals, dropping a requirement that would have prohibited lenders from using in-house staff to value houses.
Banks and thrifts that own or control appraisal-management companies will instead have to establish strict boundaries between those departments and loan officers, who often work on commission and get paid only if a loan is granted, the attorney general's office said yesterday. The change came in response to calls from the lending industry.
Cuomo opened an investigation of the U.S. mortgage industry last year as foreclosures among subprime borrowers climbed to a five-year high. The New York probe struck at the foundation of the mortgage business, which profited from lending money to homeowners and repackaging the debt into securities sold to investors.
"This revised agreement with Fannie Mae and Freddie Mac is a step forward," Cuomo said in a statement. "It preserves the core goals of ensuring appraiser independence and eliminating systemic conflicts of interest."
Lenders and investors in mortgage-backed securities depend on independent appraisals to value their collateral. Buyers use them to make sure they aren't overpaying.
Artificially high appraisals contributed to record foreclosures because borrowers ended up owing more than their houses were worth, making it difficult to refinance and impossible to sell the property for enough to pay off the mortgage.
District-based Fannie Mae and Freddie Mac of McLean were taken over by the government in September as their losses threatened to further roil the housing market.