New York Attorney General Cuomo Announces Agreement With Fannie Mae, Freddie Mac, And Ofheo

NEW YORK, NY (March 3, 2008) – Attorney General Andrew M. Cuomo today announced that the nation’s two largest purchasers of home loans, Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), have entered into cooperation agreements requiring them to only buy loans from banks that meet new standards designed to ensure independent and reliable appraisals.
 
The agreements, among the New York Attorney General, Fannie Mae, Freddie Mac and their federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), also create an independent organization to implement and monitor the new appraisal standards. Senator Charles Schumer, Chair of the Senate Banking Committee’s Housing Subcommittee, praised the agreement and the reforms which he has supported.

“With this agreement, Fannie Mae and Freddie Mac have become leaders in transforming the mortgage industry,” said Cuomo. “Now national banks have a clear choice: immediately adopt the new code and clean up appraisal fraud in the mortgage industry or stop doing business with Fannie Mae and Freddie Mac – it is that simple.”

Fannie Mae and Freddie Mac, which purchase roughly 60 percent of all home loans originated in the United States, have agreed to the following:

Establishment of the “New Home Valuation Protection Code,” (the “Code”), which creates requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence, among other reforms. (Full Code Attached). Under the new Code:
    • Mortgage Brokers will be prohibited from selecting appraisers;
    • Lenders will be prohibited from using “in-house” staff appraisers to conduct initial appraisals and
    • Lenders will be prohibited from using appraisal management companies that they own or control.

Banks will be required to adhere to Code. 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 code or they will not be purchased.

Formation of the “Independent Valuation Protection Institute,” (the “Institute”), a new organization which will implement and monitor the Code. The Institute, which will be funded with $24 million from Fannie Mae and Freddie Mac, will also:

    • Establish a complaint hotline for consumers nationwide to call if they believe the appraisal process has been tainted or if they have been harmed by appraisal fraud.
    • Serve as a contact for appraisers themselves if they believe their independence has been compromised. These complaints will be handled confidentially to protect appraisers from retaliation. The Institute will mediate complaints, or can forward them to the appropriate federal or state law enforcement agency or regulator.
    • Appoint a Board of Directors which must be approved by both the New York Attorney General and OFHEO.

“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. I want to particularly thank Senator Schumer for all of his help in readying this important agreement today.”

"This settlement represents one of the first major blows against the types of predatory lending that were so prevalent in the mortgage business of the last few years. Appraisal fraud has left millions of Americans unable to afford their homes and has created a drag on the American economy. This agreement will reduce the conflicts of interest and economic incentives that made appraisal abuse and fraud so easy and attractive to lenders," Senator Schumer said.

"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."  

“We are pleased to work with regulators to do our part to ensure sound, accurate, independent and reliable appraisals,” Fannie Mae General Counsel Beth Wilkinson said. “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.”

"Accurate appraisals are fundamental to Freddie Mac's effective credit risk management - as evidenced by our leadership in quality control programs and assistance with criminal prosecutions of mortgage fraud.  The Code of Conduct announced today enhances the independence and accuracy of the appraisal process.  And it builds on our company's long-standing efforts to fight mortgage fraud by providing strong new protections for homebuyers, mortgage investors and the housing market. In addition, we look forward to working with the New York Attorney General, OFHEO, Fannie Mae and other mortgage market participants in launching the Independent Valuation Protection Institute.  By funding the Institute, we are advancing the development and adoption of best practices in the appraisal process, " said Freddie Mac Executive Vice President and General Counsel Robert Bostrom.

For more than a year, the Attorney General’s office has conducted an industry-wide investigation into mortgage fraud. On November 7, 2007, Cuomo announced he had issued Martin Act subpoenas to Fannie Mae and Freddie Mac seeking information on the mortgage loans the companies purchased from banks, including Washington Mutual, the nation’s largest savings and loan. The subpoenas also sought information on the due diligence practices of Fannie Mae and Freddie Mac, and their valuations of appraisals.

The subpoenas came on the heels of the filing of a lawsuit by the Attorney General against First American and its subsidiary eAppraiseIt. The lawsuit, announced on November 1, 2007, detailed a scheme in numerous e-mails showing First American and eAppraiseIT caved to pressure from Washington Mutual to use appraisers who provided inflated appraisals on homes. E-mails also show that executives at First American and eAppraiseIT knew their behavior was illegal, but intentionally broke the law to secure future business with Washington Mutual. Between April 2006 and October 2007, eAppraiseIT provided over 250,000 appraisals for Washington Mutual.  The lawsuit is still pending, and the industry-wide investigation into mortgage fraud continues.

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