Closing The Barn Door After The Horse Has Gone

Home appraisal standards stiffened …

Fannie Mae and Freddie Mac, the home mortgage giants, said
Monday that they would stop buying loans from lenders that do not
use independent home appraisers, as part of an agreement with the
attorney general of New York.

The shift, which will go into effect at the start of 2009, is expected to
force large lenders like Countrywide Financial to sell or spin off their
appraisal businesses. It will also create a new group to monitor the
appraisal business.

The deal is significant victory for the attorney general, Andrew M.
Cuomo, who has been investigating the mortgage industry for a year,
and last year sued an appraisal company owned by the First American
Corporation. Because Fannie Mae and Freddie Mac are buying most
home loans being made today, the terms they dictate to banks and
mortgage companies become de facto industry standards.

The deal is unusual in that it has the blessing of federal regulators
who supervise Fannie Mae and Freddie Mac. Mr. Cuomo and other
state officials have often squabbled with federal regulators over who
should police the mortgage business, and how. Negotiations over the
agreement have been taking place for several months and intensified
in recent weeks.

Mr. Cuomo, who was secretary of housing and urban development in
the Clinton administration, said the new rules were important to
restoring the confidence in the mortgage market. He has asserted that
pressure from lenders, brokers and real estate agents has
compromised the independence of appraisals, leading to overinflated
home prices and adding to the riskiness of loans.“The appraisal is the linchpin of the system,” he said. “But theappraisal was the most susceptible to pressure.”

Under the new rules, lenders who want to sell loans to Fannie Mae or
Freddie Mac will not be allowed to use in-house appraisers to do the
first evaluation on a home. They will also be forbidden from using
appraisals done by a subsidiary or an affiliated company. Mortgage
brokers and real estate agents involved will also be prevented from
picking an appraiser.

Fannie Mae and Freddie Mac will also put up $24 million to create
the Independent Valuation Protection Institute, a group that will
accept complaints from consumers and appraisers. The institute will
put the new rules into place and monitor their enforcement, reporting
to Mr. Cuomo’s office and the Office of Federal Housing Enterprise
Oversight, the regulator that monitors Fannie Mae and Freddie Mac.