In an effort to curb the use of inflated appraisals, sweeping changes have been made to residential appraisal requirements on conforming mortgages. Among the changes is the prohibition of appraisals ordered by mortgage brokers and loan originators.
Fannie Mae and Freddie Mac have entered into cooperation agreements with New York Attorney General Andrew M. Cuomo to only purchase loans that meet a new home valuation protection code, Cuomo announced today. The code is effected on Jan. 1, 2009.
Under the new code, mortgage brokers and loan originators are prohibited from choosing or communicating with appraisers. In addition, lenders cannot use in-house staff appraisers to conduct initial appraisals, are prohibited using appraisal management companies that they own or control and cannot allow originators to work in the same unit as anyone who chooses appraisers.
"If absolute lines of independence cannot be achieved as a result of the originator's small size and limited staff, the lender must be able to clearly demonstrate that it has prudent safeguards to isolate its collateral evaluation process from influence or interference from its loan production process," the code stated.
On loans originated on or after Jan. 1, 2009, lenders will be required to represent and warrant that appraisals on loans they sell to the government sponsored enterprises adhere to the code, Cuomo said.
Other provisions include a prohibition of coercion or extortion by withholding or threatening to withhold payments for appraisals or threatening to stop giving business to an appraiser. In addition, lenders are prohibited from promising or implying future business will be given to an appraiser based on value, requesting that the appraisal only be done if a particular value can be met, and providing a target value to the appraiser.
The code also prohibits ordering a second appraisal when the first one comes in too low.
"The agreements should help restore confidence in the mortgage market by enhancing underwriting practices, reducing mortgage fraud and making home valuations more reliable," James B. Lockhart, Director of the Office of Federal Housing Enterprise Oversight, said in a statement. OFHEO regulates Fannie and Freddie.
Lenders will be required to provide borrowers with a copy of the appraisal at least three days prior to closing, unless the borrower explicitly waives this requirement.
Fannie and Freddie have contributed $24 million to the Independent Valuation Protection Institute, an organization created to implement and monitor the code. The institute will issue a public report twice yearly and establish a telephone hotline for borrowers to call if they suspect appraisal fraud or a tainted appraisal process.
In addition, appraisers who feel their independence has been compromised can contact the institute, which will mediate complaints or forward them to state or federal law enforcement agencies or regulators.
"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," Cuomo stated in the announcement. "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."
The agreement is the result of an investigation Cuomo has been conducting on appraisal fraud for more than a year. It follows a lawsuit filed in the Supreme Court of New York, New York County, against First American and its subsidiary eAppraiseIt alleging a conspiracy with Washington Mutual Inc. to produce fraudulent appraisals.
eAppraiseIT provided over 250,000 appraisals for Washington Mutual, Cuomo noted.
"Numerous e-mails showing First American and eAppraiseIT caved to pressure from Washington Mutual to use appraisers who provided inflated appraisals on homes," today's announcement said. "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."