Fannie, Freddie get new duty in deal

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Regulators yesterday took aim at one of the root causes of the housing crisis — inflated and fraudulent home appraisals — by requiring Fannie Mae and Freddie Mac to ensure the independence of appraisals behind all mortgages they buy.

Mortgage brokers would no longer be allowed to steer borrowers to appraisers they own or employ, while consumers and appraisers would be able to report fraud on a federal hot line, under an agreement initiated by New York Attorney General Andrew M. Cuomo, who served as housing secretary under former President Bill Clinton. The Bush administration initially objected to the New York investigation but signed on to the deal last month.

Mr. Cuomo won the agreement after subpoenaing Fannie Mae and Freddie Mac last fall in connection with a court suit involving appraisal fraud at Washington Mutual, the nation's largest savings and loan.

The two mortgage giants, which purchase or guarantee more than 70 percent of new mortgages, were offered assurances they won't be charged in the case in exchange for exacting the appraisal reforms and cooperating in the investigation.

The agreement "begins to set right what had gone so horribly wrong in the mortgage industry — rampant appraisal fraud," Mr. Cuomo said. "The integrity of our mortgage system depends on independent appraisals. Again and again our industrywide investigation found that banks were putting pressure on appraisers to drive up the value of loans."

Appraisers frequently complained during the housing boom from 2000 to 2005 they were under pressure from brokers, real estate agents and home sellers to ratify soaring house prices that they thought were too high. Appraisers who did not endorse the high prices were threatened with a loss of business.

"Appraisal fraud has left millions of Americans unable to afford their homes and has created a drag on the American economy," said Sen. Charles E. Schumer, New York Democrat.

Mr. Schumer was instrumental in recruiting the Office of Federal Housing Enterprise Oversight (OFHEO), Fannie and Freddie's regulator, to the agreement.

"This agreement will reduce the conflicts of interest and economic incentives that made appraisal fraud so easy and attractive to lenders," Mr. Schumer said.

The Federal Reserve also proposed rules barring lenders from coercing appraisers in far-reaching mortgage regulations outlined in December. The agreement adds a real-world penalty to those rules by making it hard for lenders who don't comply to sell mortgages they originate to investors in the mortgage market.

Besides barring brokers and lenders from steering borrowers to chosen appraisers starting Jan. 1, the agreement would organize an institute to ensure the appraisal reforms are completed, using $24 million in funds contributed by Fannie Mae and Freddie Mac.

OFHEO joined the agreement after initially objecting to Mr. Cuomo's subpoena of the mortgage enterprises in November. James B. Lockhart III, the regulator's director, said that by establishing standards in the appraisal industry the agreement ensures that stronger consumer and investor protections will be adopted throughout the $11.5 trillion mortgage market.

"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," said Fannie Mae General Counsel Beth Wilkinson.

Mr. Cuomo subpoenaed the mortgage enterprises in connection with a lawsuit against First American, the largest U.S. title company, and its subsidiary EAppraiseIT, charging the appraiser with caving to pressure from Washington Mutual to inflate appraisals.

Mr. Cuomo said he has e-mails showing that company executives knew their behavior was illegal, but intentionally broke the law to secure future business with Washington Mutual. The lawsuit says they provided more than 250,000 appraisals for Washington Mutual between April 2006 and October 2007.

First American asked the U.S. District Court in the Southern District of New York to dismiss the lawsuit, contending that only the U.S. government has authority to regulate appraisers or savings and loans.