The mortgage home loan market is another step closer towards building a stronger model for future growth due to the diligence of New York Attorney General Andrew Cuomo. The attorney general announced this week that home buyers will be protected from fraudulent home appraisals that inflate the home prices under a new agreement signed with Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac are publicly owned government-sponsored enterprises that buy qualifying residential home loans from mortgage lenders, pools and packages the mortgages into new securities, resells the mortgage backed securities in the open market. According to Cuomo, Fannie Mae and Freddie Mac had been purchasing mortgages from lenders they knew to be overinflated because of the pressure mortgage lenders placed on property appraisers to increase the listed value of homes, a contributing factor to the national mortgage correction that is forcing many families into foreclosure.
Under the Cuomo agreement, mortgage home loan lenders starting in 2009 will not be allowed to use their own staff appraisers for initial appraisals and will be banned from employing appraisal management firms that they control or own.
Freddie Mac and Fannie Mae purchase approximately 80% of all mortgage loans originated in the nation. The policies of the two companies have immense impact upon lenders and the way they conduct their business. Cuomo believes that lenders knowingly forced appraisers to inflate prices, creating an inherent conflict of interest.
This inherent flaw in the residential real estate mortgage business had to be rectified. The agreement with Fannie and Freddie solves this issue of appraisal wrongdoing, which will benefit all Americans. Trustworthy appraisals are an instrumental part of the home buying process and cannot run counter to accurate home valuations.
The mortgage lenders will have to start complying with new Fannie Mae and Freddie Mac rules in the beginning of next year, if they want to sell their mortgages to the two companies. Companies such as, Countrywide Financial and Wells Fargo have in-house appraisal divisions that would have to be spun off. Also, Freddie Mac and Fannie Mae will pay $24 million to create a new institute to monitor the new valuation rules.
The new appraisal valuation rules will also serve the larger interests of home buyers, the housing market, mortgage arena, and the broader economy. A countrywide hotline will be set up to handle any consumer complaints about suspected fraudulent appraisals. Home appraisers who feel undue pressure to bump up home valuations can also contact the institute.
In addition, to setting up the hotline, the new institute will formally report semiannually to the attorney general and the Office of Federal Housing Enterprise Oversight, the office with oversight over Freddie Mac and Fannie Mae.
The agreement is a welcome addition to creating more transparency in the mortgage and housing market. The new valuation reforms will not only restore consumer confidence but create a safer and reliable home appraisal process.