Fannie Seen Near Deal on Appraisals with Cuomo
American Banker | Tuesday, February 26, 2008
WASHINGTON - Fannie Mae is close to striking a deal with New York Attorney General Andrew Cuomo that would set appraisal standards for any mortgage it buys.
The government-sponsored enterprise has told lenders that, as of Sept. 1, it will not buy loans from originators that use in-house appraisers to value properties. Fannie also said it will forbid lenders to rely on any appraisal obtained by a broker and will create a clearinghouse of appraiser information, conduct, and activity.
Once in effect, the Fannie deal has the potential to restructure the appraisal business, observers said. For example, lenders such as Countrywide Financial Corp., which use their in-house appraisal units to evaluate mortgages, would no longer be able to sell to Fannie unless they began outsourcing the appraisal work. Observers said this would lead some lenders to consider selling their appraisal units.
"They are definitely going to be rethinking the value of in-house appraisal business," said Brian Chappelle, a partner at Potomac Partners, a Washington consulting firm to the mortgage industry. "It's effectively gone because of this."
Final conditions of the deal were still being worked out, but sources said they expect an announcement soon. In anticipation of the agreement with Mr. Cuomo, Fannie sent a memo to lenders which was obtained by American Banker.
It was unclear whether Freddie Mac would strike a similar deal with Mr. Cuomo, though several sources said they expected it would. Representatives of Fannie and Freddie declined to comment. A spokesman for Mr. Cuomo said late Monday that there "is no agreement with either Fannie Mae or Freddie Mac."
"We have had ongoing discussions for several months. At the end of the process, we will either have agreements or we will take other appropriate action. This Office prefers to pursue cooperative resolutions before litigating and that is what we are doing here."
The agreement with Fannie comes in the wake of an investigation begun in November by Mr. Cuomo into appraisal practices at First American Corp. in Santa Ana., Calif., and its appraiser, eAppraiseIT LLC, which he accused of inflating the value of home loans under pressure from Washington Mutual Inc. All three companies have denied the accusations.
Mr. Cuomo subpoenaed Fannie and Freddie as part of the investigation and asked them to supply details about Wamu's loans, and their due diligence practices related to appraisals. Though the Office of Federal Housing Enterprise Oversight raised questions about Mr. Cuomo's jurisdiction, it did not block the subpoenas. A spokeswoman for OFHEO said the agency was involved in the talks Monday but declined to discuss details. In its memo, Fannie described its new appraisal standards as a "cooperation agreement" with Mr. Cuomo.
Under it, Fannie said it would create a National Appraisal Clearinghouse, to which all lenders would be required to provide post-purchase copies of appraisal documents. The Clearinghouse, which would be run as an independent entity with an executive and board of directors, would staff a hotline for consumer complaints and do annual public reporting.
Some observers said financial institutions may benefit from one of the agreement's conditions. Currently, federal banks and thrifts must conform with a more stringent process for selecting appraisers than brokers, giving the latter a competitive advantage, Mr. Chappelle said. By forbidding lenders to let brokers obtain their own appraisals, this advantage would disappear, he said.
The agreement is a significant political victory for Mr. Cuomo, observers said. He and his predecessor, New York Gov. Eliot Spitzer, have frequently noted their inability to toughen standards for banks and thrifts, which are protected by federal preemption laws.
The agreement effectively steps around that issue by forcing Fannie, and probably Freddie, to impose these standards.
"By getting the GSEs to help him, that really bolsters this move," said Brian Gardner, a vice president at KBW Inc.'s Keefe, Bruyette & Woods Inc. "They really can be the enforcers on this much more than he can be."
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