Mortgage Appraisal Reform – NY Attorney General Pushes for Agreement

March 4, 2008

Andrew M. Cuomo, New York Attorney General, announced agreement between his office and Freddie Mac and Fannie Mae allowing the two largest purchasers of home loans to buy only from those lenders that meet new standards for appraisals.

An independent organization will be established to implement and monitor new appraisal standards. The following was agreed to:

  • Establishment of the “New Home Valuation Protection Code,” which creates requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence, among other reforms. Under the new code mortgage brokers will be prohibited from selecting appraisers and lenders will be prohibited from using “in-house” staff appraisers to conduct initial appraisals or from using appraisal management companies that they own or control.
  • 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 new code or they will not be purchased.
  • The new “institute” which will be funded with $24 million from Fannie and Freddie will field complaints from appraisers who believe that their independence has been compromised and will protect those appraisers from retaliation. The institute will also establish a nationwide consumer hotline to manage complaints about appraisal fraud or violations of the new code. The institute will be funded with $24 million from Fannie Mae and Freddie Mac and will be required to report to OFHEO and the Attorney General’s office on a regular basis.

As reported in this blog, many of the mortgage fraud schemes revolve around fraudulent and/or inaccurate appraisals. Many appraisal companies are actively involved in the fraud schemes by inflating the appraisals on the properties in question. In some cases, they are paid a kickback based on the excess funding generated from the bogus loans and mortgage frauds.

The following quotes were from Mortgage Daily News: “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.”

“Accurate, independent appraisals are very important to ensuring the safety and soundness of Fannie Mae and Freddie Mac and the mortgage market,” said OFHEO Director James Lockhart. “OFHEO is committed to working closely with fellow regulators, the Attorney General, Fannie Mae, Freddie Mac, appraisers, lenders and other market participants to assure that the roll-out of the new code builds upon best practices, recognizes constructive comments to identify further refinements, and avoids unintended consequences.”

According to the Office of Federal Housing Enterprise Oversight, “There are many significant provisions in the agreements that are designed to strengthen the independence of appraisers, including eliminating broker-ordered appraisals, prohibiting appraiser coercion, and reducing the use of appraisals prepared in-house or through captive appraisal management companies in underwriting mortgages.”

Questions:

  1. Is this too little too late to correct the seemingly rampant fraud in the mortgage industry?
  2. Will agreements like this become the norm as government sets out to ensure against mortgage fraud?
  3. Should the industry be allowed to govern itself in light of the issues and mortgage crisis we face?

Your comments are welcome! Ethics and White Collar Crime Speaker – Chuck Gallagher – signing off…