ALBANY, N.Y. — New York Attorney General Andrew Cuomo said Monday that prospective homebuyers will be protected from fraudulently inflated prices under a deal with government-sponsored lenders Fannie Mae and Freddie Mac.
Cuomo said lenders have pressured appraisers to bump up the listed value of homes, contributing to a mortgage crisis that is forcing families into foreclosure.
Under the agreement, which ends Cuomo’s investigation into the companies, lenders won’t be allowed to use in-house staffers for initial appraisals and will be prohibited from using appraisal-management companies they own or control.
Fannie Mae and Freddie Mac purchase nearly 80 percent of all home loans originated in the U.S., Cuomo said in a phone interview.
“We believe the appraisals were often fraudulent because of a conflict of interest and pressure on the appraisers,” Cuomo said. “To us, this issue was a pervasive issue that needed to be solved.”
The companies acknowledged no wrongdoing and said the agreement will benefit everyone. The Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, participated and approved the agreement.
“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 in a statement.
She said Fannie Mae will make sure appraisals are independent and the valuations placed on homes are accurate under the Home Valuation Protection Code.
The companies will require lenders to conform to the code beginning in 2009.
“It’s going to create massive change,” said Brian Chappelle, a partner at Potomac Partners in Washington, a consulting firm to the mortgage industry.
He said mortgage lenders that own appraisal companies — such as Wells Fargo and Countrywide — may have to spin off those divisions because of the new prohibitions against in-house appraisals.
Fannie Mae and Freddie Mac will pay $24 million to create an institute that will monitor adherence to the valuation code.
“These initiatives clearly serve the interests of the nation’s homebuyers, the housing markets and the broader economy,” said Robert Bostrom, Freddie Mac’s general counsel.
A nationwide hotline will be set up for consumers who suspect fraudulent appraisals or fraud. Appraisers who feel pressure to pad valuations also can contact the institute under the agreement.
The institute will report back to the attorney general and OFHEO every six months.
