Fannie Mae, Freddie Mac Appraisal Agreement May Violate Law

May 27 2008 - Fannie Mae and Freddie Mac’s agreement to restrict banks from using in-house appraisal companies may violate federal law, U.S. Comptroller of the Currency John C. Dugan said in a letter to the companies’ supervisor.

The two companies, which own or guarantee about 45 percent of the $12 trillion in U.S. home loans, made a deal in March with New York Attorney General Andrew Cuomo and the Office of Federal Housing Enterprise Oversight to stop buying mortgages from lenders that use in-house home appraisals for their loans.

The agreement and new appraisal code “violate or conflict with federal law in fundamental respects” and should be withdrawn, Dugan said in a letter to Ofheo Director James Lockhart. The Office of the Comptroller of the Currency, which regulates national banks, has “substantial concerns about the unintended adverse consequences” on U.S. banks, he said.

The OCC is joining mortgage and appraisal industry groups and the Office of Thrift Supervision in criticizing the deal, which was intended by Cuomo and Ofheo to improve accuracy in home valuations by separating them from the lenders making the loans. Cuomo began a probe of the U.S. mortgage industry last year as foreclosures among subprime borrowers climbed to a five-year high.

Ofheo is reviewing Dugan’s letter and will consider his concerns, Ofheo spokeswoman Stefanie Mullin said in an e-mail.

Unintended Consequences

“As this code is an update and strengthening of the enterprises’ existing appraisal standards, we forwarded Comptroller Dugan’s letter to them,” she said. “We expect the enterprises to review this letter and the many other comments they received and to propose changes to the code to address unintended consequences.” Fannie Mae and Freddie Mac are known as government-sponsored enterprises.

Cuomo’s office did not immediately return a call and e-mails seeking comment. A spokeswoman at Fannie Mae, Janis Smith, declined to comment. Freddie Mac spokesman Doug Duvall declined to comment.

“Flawed appraisals artificially inflate home prices and are often a sign of mortgage fraud and undue influence on appraisers,” Ofheo and Cuomo’s office said in a joint statement when they announced the deal. It will likely prohibit lenders from also using appraisals from firms they own or control in processing loans sold to Fannie Mae or Freddie Mac.

Because Fannie and Freddie control so much of the market, the OCC said the new policy “would impose new structural and organizational requirements on lenders accountable for financing an overwhelming portion of the U.S. residential real estate business.”

Lacking Authority

Ofheo didn’t follow the proper rules to make the change and doesn’t have the authority to set policies affecting U.S. banks regulated by the OCC, Dugan said. The appraisal code conflicts with current bank laws, would result in a “significant and costly change” in lending practices and will not apply to national banks, he said.

Dugan said he is concerned that “major portions of the code will undermine, rather than enhance, the quality and reliability of appraisals.

“Second, the application of the code will unnecessarily raise mortgage origination costs for lenders, thereby increasing the cost of mortgage loans for consumers, without actually enhancing protections and other consumer benefits,” he said.

Created by Congress to increase homeownership, Fannie Mae and Freddie Mac have this year become one of the few avenues for new mortgage financing as competitors scaled back amid record increases in delinquencies and defaults. Their share of the conforming mortgage market, or new loans of $417,000 or less, almost doubled to 81 percent in the first quarter.

The companies make money by holding mortgage assets and on guarantees of mortgage-backed securities they create out of loans from primary lenders. They’ve posted three straight quarterly losses totaling $7.1 billion at Fannie Mae and $3.9 billion at Freddie Mac.

Fannie Mae was down 93 cents, or 3.4 percent, to $26.66 at 12:33 in New York Stock Exchange composite trading. Freddie Mac fell 70 cents, or 2.7 percent, to $25.03.

Fannie, Freddie Appraisal Agreement May Violate Law
By Dawn Kopecki | Bloomberg