Freddie Appraisal Agreement May Violate Law
27 (Bloomberg) -- Fannie Mae and Freddie Mac's
agreement to restrict banks from using in-house
appraisal companies may violate federal law, U.S.
Comptroller of the Currency John C. Dugan said
in a letter to the companies' supervisor.
two companies, which own or guarantee about 45
percent of the $12 trillion in U.S. home loans,
made a deal in March with New York Attorney General
Andrew Cuomo and the Office of Federal Housing
Enterprise Oversight to stop buying mortgages
from lenders that use in-house home appraisals
for their loans.
agreement and new appraisal code ``violate or
conflict with federal law in fundamental respects''
and should be withdrawn, Dugan said in a letter
to Ofheo Director James Lockhart. The Office of
the Comptroller of the Currency, which regulates
national banks, has ``substantial concerns about
the unintended adverse consequences'' on U.S.
banks, he said.
OCC is joining mortgage and appraisal industry
groups and the Office of Thrift Supervision in
criticizing the deal, intended by Cuomo and Ofheo
to make home valuations more accurate by separating
them from the lenders making the loans. Reworking
the agreement could make it harder for Fannie
Mae and Freddie Mac management to address other
investor concerns such as the $7.1 billion in
cumulative losses Fannie Mae has posted over the
last three quarters, analysts said.
a distraction they don't need,'' said Jim Vogel,
a debt analyst with FTN Financial Capital Markets,
a division of First Tennessee Bank N.A. in Memphis,
Tennessee. ``If this heats up the way the OCC
seems to think it should, then you're going to
throw sand in the gears of a number of other initiatives
that are probably more important for today,''
Mae fell $1.06, or 3.8 percent, to $26.53 in composite
trading on the New York Stock Exchange today.
The stock has fallen 34 percent his year. Freddie
Mac fell $1, or 3.9 percent, to $24.73, down 27
percent for the year. The companies had the two
worst percentage drops on the S&P 500 Index
``appraisal process for home loans is broken,''
Cuomo's office said in an e-mailed statement.
Cuomo began a probe of the U.S. mortgage industry
last year as foreclosures among subprime borrowers
climbed to a five-year high. The agreement with
Fannie Mae and Freddie Mac is ``groundbreaking''
and will ``help consumers and restore integrity
to this crucial market,'' the statement said.
concerns are being taken into consideration, according
to Ofheo spokeswoman Stefanie Mullin and the statement
from Cuomo's office.
forwarded Dugan's letter to the companies and
expects Fannie Mae and Freddie Mac to ``review
this letter and the many other comments they received
and to propose changes to the code to address
unintended consequences,'' Mullin said in an e-mail.
Mae spokeswoman Janis Smith and Freddie Mac spokesman
Doug Duvall both declined to comment.
has been increasingly leaning on the government-
sponsored enterprises to do more to back the U.S.
mortgage market. The Senate Banking Committee
approved legislation last week that overhauls
their oversight while also requiring the two to
help foot the bill for a federal program insuring
mortgages for struggling borrowers.
has also lifted portfolio restrictions and eased
their capital constraints while lawmakers temporarily
raised the limits on loans the companies can buy
from $417,000 to $729,750 to help back the market.
The companies are now lobbying Congress to make
some of those changes permanent.
has pushed for stronger oversight and this month
said the companies are a ``point of vulnerability''
to the U.S. financial system because their liabilities
are so high. The fair value of Freddie Mac's assets
dropped to negative $5.2 billion in the first
quarter. Fannie Mae's fell 66 percent to $12.2
appraisals artificially inflate home prices and
are often a sign of mortgage fraud and undue influence
on appraisers,'' Ofheo and Cuomo's office said
in a joint statement when they announced the deal.
It will likely prohibit lenders from also using
appraisals from firms they own or control in processing
loans sold to Fannie Mae or Freddie Mac.
Fannie and Freddie control so much of the market,
the OCC said the new policy ``would impose new
structural and organizational requirements on
lenders accountable for financing an overwhelming
portion of the U.S. residential real estate business.''
didn't follow the proper rules to make the change
and doesn't have the authority to set policies
affecting U.S. banks regulated by the OCC, Dugan
said. The appraisal code conflicts with current
bank laws, would result in a ``significant and
costly change'' in lending practices and will
not apply to national banks, he said.
said he is concerned that ``major portions of
the code will undermine, rather than enhance,
the quality and reliability of appraisals.
the application of the code will unnecessarily
raise mortgage origination costs for lenders,
thereby increasing the cost of mortgage loans
for consumers, without actually enhancing protections
and other consumer benefits,'' he said.
by Congress to increase homeownership, Fannie
Mae and Freddie Mac have this year become one
of the few avenues for new mortgage financing
as competitors scaled back amid record increases
in delinquencies and defaults. Their share of
the conforming mortgage market, or new loans of
$417,000 or less, almost doubled to 81 percent
in the first quarter.
companies make money by holding mortgage assets
and on guarantees of mortgage-backed securities
they create out of loans from primary lenders.
They've posted three straight quarterly losses,
including $3.9 billion at Freddie Mac, amid the
worst surge in mortgage defaults in seven decades.
S&P/Case-Shiller home-price index dropped
14.4 percent in March from a year earlier, the
most since the figures were first published in
2001. Separate figures from the Commerce Department
showed sales of new homes were the second-lowest
since 1991 in April.
contact the reporter on this story: Dawn Kopecki
in Washington at email@example.com.
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