Wednesday, March 5, 2008

Fannie Mae and Freddie Mac Tighten Appraisal Standards

by Amy Lillard

In yet another regulatory rule sparked by the housing market decline, Fannie Mae and Freddie Mac have announced an agreement to stricter appraisal standards for home mortgages.

The agreement is with New York Attorney General Andrew Cuomo, who has been probing fraud in the mortgage industry for the past year. The agreement is intended to discourage inflated appraisals, one of several major problems behind the subprime collapse and general housing slump.

Fannie Mae and Freddie Mac are the government-sponsored entities that provide mortgage market liquidity and funding for mortgage loans. The two companies buy about 60% of all home loans originated in the country. With this agreement, Fannie Mae and Freddie Mac will buy only those loans from banks that meet strict standards of independent, reliable appraisals. The code of conduct will take effect in January of 2009, and will set a standard for the industry.

The agreement includes several key components:

> Lenders and their representatives will be barred from interfering with appraisals. Pressure from these sources cause appraisers to supply inflated estimates of property values. Appraisers are encouraged to succumb to such pressure: without appraisal values that allow loans to be extended, the appraisers risk losing business. aklamentilibin

> Bank employees will not be allowed to choose appraisers.

> Lenders will be prevented from using employee or affiliate appraisals as a basis for making loans.
Lenders will not be allowed to use appraisals ordered by mortgage brokers.

An independent monitoring organization will be created to ensure compliance with the new regulations.

Appraisals are usually required by lenders before home loans are extended. The purpose of an appraisal is to provide a reliable estimate of the property's value. Inflated appraisals can encourage bigger loans than necessary. This can hurt the borrower in their monthly payments and when home prices fall; it can also expose the lenders to losses. Some experts contend that appraisals nationwide are inflated at least 10 percent.

Related WSJ Article

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