Lenders who want to do business with Fannie Mae and Freddie Mac will no longer be allowed to use in-house staff appraisers or appraisal management companies they own or control under an agreement with regulators.

Fannie and Freddie have agreed to new standards designed to ensure the independence of the appraisal process, and will provide $24 million in funding over a five-year period for independent monitoring of the new standards.

Lenders who want to do business with Fannie Mae and Freddie Mac will no longer be allowed to use in-house staff appraisers or appraisal management companies they own or control under an agreement with regulators.

Fannie and Freddie have agreed to new standards designed to ensure the independence of the appraisal process, and will provide $24 million in funding over a five-year period for independent monitoring of the new standards.

The agreements, announced today, are an outgrowth of New York Attorney General Andrew Cuomo’s yearlong investigation into the packaging of mortgage loans into securities sold to Wall Street investors.

National banks "have a clear choice," Cuomo said in a statement. "Immediately adopt the new code and clean up appraisal fraud in the mortgage industry or stop doing business with Fannie Mae and Freddie Mac — it is that simple."

On Nov. 1, New York sued First American Corp. and its subsidiary eAppraiseIT, accusing the companies of succumbing to pressure from Washington Mutual to inflate property appraisals. WaMu was not named in the suit, and all three companies have denied wrongdoing.

A week later, the attorney general’s office subpoenaed government-chartered mortgage financers Fannie Mae and Freddie Mac, and has reportedly subpoenaed Merrill Lynch & Co., Bear Stearns, Deutsche Bank AG and other firms involved in bundling mortgage loans as investments.

A due diligence provider of loan reviews, Clayton Holdings Inc. agreed to cooperate with the investigation in January in return for immunity from prosecution in New York (see Inman News story).

Fannie and Freddie’s federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), signed off on the agreements. OFHEO Director James Lockhart, who had criticized Cuomo’s subpoenas of Fannie and Freddie, said he would be "closely monitoring" the rollout of the new standards over the next nine months to make sure they do not have "unintended consequences."

In November, Lockhart said Fannie and Freddie have no incentive to knowingly purchase or guarantee mortgages with inflated appraisals. Unlike firms that sell mortgage-backed securities (MBS) to investors, Lockhart said, the government-sponsored enterprises are on the hook if loans go bad, because they guarantee payments to MBS investors.

Fannie Mae General Counsel Beth Wilkinson said in a statement today that the company has always required lenders to buy back loans that do not meet Fannie’s standards and requirements, and that the new standards reinforce existing practices.

Robert Bostrom, Freddie Mac’s general counsel, issued a similar statement saying the standards will enhance "the independence and accuracy of the appraisal process" and build on the company’s "longstanding efforts to fight mortgage fraud by providing protections for home buyers, mortgage investors and the housing market."

Lenders will have until Jan. 1, 2009, to include assurances in their representations and warranties that mortgages originated after that date conform to the new standards.

The standards established under a "Home Valuation Code of Conduct" will prohibit mortgage brokers and real estate agents from selecting appraisers. When underwriting loans, lenders who want to do business with Fannie and Freddie will be barred from relying on appraisal reports prepared by in-house appraisers, and most affiliated companies or real estate settlement services providers as defined under the Real Estate Settlement Procedures Act (RESPA).

Lenders may use reports obtained through affiliated appraisal management companies, but only if their ownership interest in the company is 20 percent or less, and the company is operated independently and the lender has no involvement in its day-to-day business operations including selection of appraisers.

Lenders will still be permitted to use in-house appraisers to order appraisals, conduct reviews or other pre- or post-funding quality control, develop internal automated valuation models, and prepare appraisals in connection with loan workouts.

***

Send tips or a Letter to the Editor to matt@inman.com, or call (510) 658-9252, ext. 150.

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