Loan Companies To Adopt New Appraisal Standards

By Bloomberg News
March 4, 2008

Fannie Mae and Freddie Mac, the biggest sources of financing for American home loans, reached an agreement with Attorney General Cuomo to buy mortgages only from lenders that adopt new standards intended to ensure independent home appraisals.

The new rules announced yesterday prohibit mortgage brokers from selecting appraisers and lenders from using in-house staff to do valuations for any home loans the government-chartered companies purchase. Lenders will also be barred from using appraisal management firms they own or control.

Mr. Cuomo opened an investigation of the American mortgage industry last year as foreclosures among subprime borrowers climbed to a five-year high. The New York probe strikes at the foundation of the mortgage business, which profited from lending money to homeowners and repackaging the debt into securities sold to investors.

"The goal of the office is to find out what went wrong and how to fix the problem," Mr. Cuomo said yesterday at a news conference. "What we identified as the common denominator, if you will, was appraisal valuation."

Banks so far have recorded more than $180 billion in writedowns on securities linked to home loans. Inflated appraisals undermine the mortgage-backed securities market because bonds and derivatives based on artificially high home valuations don't have enough collateral behind them.

"We believe the appraisals were often fraudulent because there were conflicts of interest and pressure on the appraisers," Mr. Cuomo said.

Fannie Mae and Freddie Mac also will pay $24 million to create an independent organization to implement and monitor the new standards, Mr. Cuomo said. The accord covers appraisals for mortgages originated on or after January 1, 2009.