Fannie, Freddie to Overhaul Appraisals in Cuomo Deal

March 3, 2008

Attorney General Andrew M. Cuomo, Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), have entered into cooperation agreements requiring them to only buy loans from banks that meet new standards designed to ensure independent and reliable appraisals.

The agreements, among the New York Attorney General, Fannie Mae, Freddie Mac and their federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), also create an independent organization to
implement and monitor the new appraisal standards. Senator Charles Schumer, Chair of the Senate Banking Committee’s Housing Subcommittee, praised the agreement and the reforms which he has supported.

With this agreement, Fannie Mae and Freddie Mac have agreed to the following:

  • Establishment of the “New Home Valuation Protection Code,” (the “Code”), which creates requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence, among other reforms. (Full Code Attached). Under the new Code:

    • Mortgage Brokers will be prohibited from selecting appraisers;
    • Lenders will be prohibited from using “in-house” staff appraisers to conduct initial appraisals and
    • Lenders will be prohibited from using appraisal management companies that they own or control.

  • Banks will be required to adhere to Code. Beginning January 1, 2009, Fannie Mae and Freddie Mac will require that lenders represent and warrant that appraisals related to mortgage loans originated on or after January 1, 2009 conform to the code or they will not be purchased.

  • Formation of the “Independent Valuation Protection Institute,” (the “Institute”), a new organization which will implement and monitor the Code. The Institute, which will be funded with $24 million from Fannie Mae and Freddie Mac, will also:

    • Establish a complaint hotline for consumers nationwide to call if they believe the appraisal process has been tainted or if they have been harmed by appraisal fraud.

    • Serve as a contact for appraisers themselves if they believe their independence has been compromised. These complaints will be handled confidentially to protect appraisers from retaliation. The Institute will mediate complaints, or can forward them to the appropriate federal or state law enforcement agency or regulator.

    • Report publicly on its activities to the New York Attorney General and OFHEO on a bi-annual basis.

    • Appoint a Board of Directors which must be approved by both the New York Attorney General and OFHEO.

“Today’s agreement with Fannie Mae and Freddie Mac begins to set right what had gone so horribly wrong in the mortgage industry – rampant appraisal fraud,” said Cuomo. “The integrity of our mortgage system depends on independent appraisals. Again and again our industry-wide investigation found that banks were putting pressure on appraisers to drive up the value of loans just to make a quick buck. We believe the new standards, and the new independent monitor agreed to today, can begin to erase this problem from the industry. I want to particularly thank Senator Schumer for all of his help in readying this important agreement today.”

For more than a year, the Attorney General’s office has conducted an industry-wide investigation into mortgage fraud. On November 7, 2007, Cuomo announced he had issued Martin Act subpoenas to Fannie Mae and Freddie Mac seeking information on the mortgage loans the companies purchased from banks, including Washington Mutual, the nation’s largest savings and loan. The subpoenas also sought information on the due diligence practices of Fannie Mae and Freddie Mac, and their valuations of appraisals.

The subpoenas came on the heels of the filing of a lawsuit by the Attorney General against First American and its subsidiary eAppraiseIt. The lawsuit, announced on November 1, 2007, detailed a scheme in numerous e-mails
showing First American and eAppraiseIT caved to pressure from Washington Mutual to use appraisers who provided inflated appraisals on homes. E-mails also show that executives at First American and eAppraiseIT knew their behavior was illegal, but intentionally broke the law to secure future business with Washington Mutual.

Between April 2006 and October 2007, eAppraiseIT provided over 250,000 appraisals for Washington Mutual.The lawsuit is still pending, and the industry-wide investigation into mortgage fraud continues.

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