Fannie Mae Proposes Ban on Lender Use of In-House Appraisers

February 27, 2008 - Fannie Mae, the biggest source of financing for U.S. home loans, told lenders it will probably ban their use of appraisals by in-house employees or those arranged by brokers.

Fannie Mae distributed the proposal, a response to New York Attorney General Andrew Cuomo’s yearlong mortgage probe, to lenders in a “talking points” memo this week, according to a person familiar with the document. The memo was published on American Banker’s Web site yesterday.

“It would be a monumental change because it would require a shift in the way that the lending industry does business,” said Jonathan Miller, chief executive officer of Manhattan-based appraisal company Miller Samuel Inc. and a longtime proponent of creating a firewall between residential appraisers and mortgage originators. “I think it would be tremendous.”

Rising foreclosures on U.S. home loans spurred Cuomo’s investigation. He initially subpoenaed appraisers to ask whether mortgage brokers or lenders pressured them to inflate home valuations, which in turn would artificially boost the value of collateral supporting mortgage-backed securities.

“Fannie Mae wishes to cooperate with the New York AG’s investigation and, as part of a cooperation agreement, will likely agree to a number of items,” according to the memo.

The proposed changes include banning Fannie Mae’s partners from using appraisers employed by their wholly owned subsidiaries. Mortgage lenders that own appraisal companies include Countrywide Financial Corp., the nation’s largest home- loan originator.

The restrictions would apply to loans acquired after Sept. 1, according to the memo. Fannie also told lenders that an independent appraisal clearinghouse likely would be established.

Laughable Practice

About three quarters of residential mortgage appraisals are arranged through brokers who only get paid if a loan closes, Miller said today in a phone interview. He called the practice “laughable” because it creates a financial incentive for mortgage brokers to push appraisers toward higher valuations. Higher appraisals also mean more homeowners qualify to refinance their homes and take cash out, he said.

Cuomo said Nov. 7 that he subpoenaed government-chartered Fannie Mae and Freddie Mac, seeking information on whether the loans they purchased from lenders including Washington Mutual Inc., the nation’s largest thrift, were based on tainted property evaluations. He also sued First American Corp., the largest U.S. title insurer, claiming it inflated home values under pressure from Washington Mutual.

Freddie Mac

Freddie Mac, based in Mclean, Virginia and Washington-based Fannie Mae own or guarantee about 40 percent of the $11.5 trillion in U.S. residential-mortgage debt. Congress created the companies to increase financing and provide market stability by buying mortgages from lenders, who in turn use cash from the sales to make more mortgage loans.

Cuomo spokesman Jeffrey Lerner said today in an e-mail that that Cuomo, Fannie Mae and Freddie Mac hadn’t reached an agreement.

“We have had ongoing discussions for several months,” Lerner said. “At the end of the process, we will either have agreements or we will take other appropriate action.”

Cuomo prefers to pursue cooperative resolutions before litigating, Lerner said.

“We are continuing to work with the attorney general and Fannie Mae and Freddie Mac,” said Corinne Russell, spokeswoman for the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac.

A Fannie Mae spokeswoman who didn’t want her name used said today that discussions are moving forward.

No Similar Memo

Freddie Mac hasn’t sent any memo similar to Fannie Mae’s, said company spokeswoman Sharon McHale.

“We are cooperating fully with the attorney general’s investigation, but at this point it would be premature to speculate as to what the outcome will be,” McHale said.

Countrywide representatives didn’t immediately return phone messages seeking comment.

Fannie Mae rose 30 cents to $27.27 in New York Stock Exchange composite trading at 4:21 p.m. The stock reached a one- year low of $25.32 earlier today. Freddie Mac fell 12 cents to $25.09.

Fannie Memo Proposes Ban on Lender Use of In-House Appraisers
By Karen Freifeld and Sharon L. Lynch | Bloomberg