NEW YORK - Fannie Mae and Freddie Mac, under pressure from New York Attorney General Andrew Cuomo, said they will only buy mortgages from lenders that adopt new standards created to ensure independent home appraisals.
The government-chartered agencies reached an agreement yesterday with Cuomo that prohibits mortgage brokers from selecting appraisers and lenders from using in-house staff to do valuations. Lenders will also be barred from using appraisal management firms they own or control.
"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," Cuomo said.
Cuomo opened an investigation last year of the US mortgage industry. Foreclosures among subprime borrowers reached a five-year high in 2007. Banks also recorded more than $180 billion in write-downs on securities linked to home loans. The probe strikes at the foundation of the mortgage business, which profited from making home loans and repackaging them into securities sold to investors.
Fannie Mae and Freddie Mac also will pay $24 million to create an independent organization to implement and monitor the new standards for the loans they purchase, Cuomo said. The accord covers appraisals for mortgages originated on or after Jan. 1, 2009.
Artificially inflated appraisals undermine the mortgage-backed securities market because bonds and derivatives based on faulty home valuations aren't backed by enough collateral.
"We are pleased to work with regulators to do our part to ensure sound, accurate, independent and reliable appraisals," Fannie Mae general counsel Beth Wilkinson said. "As the nation's leading purchaser of mortgage loans in the secondary market, Fannie Mae shares the interests of consumers in the integrity of the home valuation process, which is an important part of a well functioning market."
Freddie Mac executive vice president and general counsel Robert Bostrom said: "The code of conduct announced today enhances the independence and accuracy of the appraisal process."
Cuomo said his probe is continuing and includes the securities market that packages mortgages into bonds.
The attorney general, a former secretary of the US Department of Housing and Urban Development, started investigating the home loan industry as data from the Washington-based Mortgage Bankers Association showed an increase in delinquencies among subprime borrowers and a record rate of late payments by buyers who purchased houses with minimal down payments.
Fannie Mae and Freddie Mac own or guarantee about 40 percent of the $11.5 trillion in US residential-mortgage debt. Congress created the companies to increase financing and provide market stability.