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Rachel Dollar, the editor of Mortgage Fraud Blog, is an attorney and Certified Mortgage Banker who handles litigation for lending institutions and secondary market investors. She is an author and a nationally recognized speaker on the topic of mortgage fraud. Ms. Dollar is a shareholder with the law firm of Smith Dollar, PC, is licensed to practice law in California and maintains offices in Santa Rosa, California. Email Ms. Dollar
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NY AG Reaches Agreement To Prohibit Appraisal Coercion
Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) have entered into cooperation agreements with Attorney General Andrew M. Cuomo requiring them to only buy loans from banks that meet new standards designed to ensure independent and reliable appraisals.
The agreements, among the New York Attorney General, Fannie Mae, Freddie Mac and their federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), also create an independent organization to implement and monitor the new appraisal standards. Senator Charles Schumer, Chair of the Senate Banking Committee’s Housing Subcommittee, praised the agreement and the reforms which he has supported.
“With this agreement, Fannie Mae and Freddie Mac have become leaders in transforming the mortgage industry,” said Cuomo. “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 – it is that simple.”
Fannie Mae and Freddie Mac, which purchase roughly 60 percent of all home loans originated in the United States, have agreed to the following:
Establishment of the “New Home Valuation Protection Code,” (the “Code"), which creates requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence, among other reforms. Under the new Code:
Mortgage Brokers will be prohibited from selecting appraisers;
Lenders will be prohibited from using “in-house” staff appraisers to conduct initial appraisals and Lenders will be prohibited from using appraisal management companies that they own or control.
Banks will be required to adhere to Code. Beginning January 1, 2009, Fannie Mae and Freddie Mac will require that lenders represent and warrant that appraisals related to mortgage loans originated on or after January 1, 2009 conform to the code or they will not be purchased.
Formation of the “Independent Valuation Protection Institute,” (the “Institute"), a new organization which will implement and monitor the Code. The Institute, which will be funded with $24 million from Fannie Mae and Freddie Mac, will also:
* Establish a complaint hotline for consumers nationwide to call if they believe the appraisal process has been tainted or if they have been harmed by appraisal fraud.
* Serve as a contact for appraisers themselves if they believe their independence has been compromised. These complaints will be handled confidentially to protect appraisers from retaliation. The Institute will mediate complaints, or can forward them to the appropriate federal or state law enforcement agency or regulator.
* Report publicly on its activities to the New York Attorney General and OFHEA on a bi-annual basis.
* Appoint a Board of Directors which must be approved by both the New York Attorney General and OFHEO.
“Today’s agreement with Fannie Mae and Freddie Mac begins to set right what had gone so horribly wrong in the mortgage industry – rampant appraisal fraud,” said Cuomo. “The integrity of our mortgage system depends on independent appraisals. 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. We believe the new standards, and the new independent monitor agreed to today, can begin to erase this problem from the industry. I want to particularly thank Senator Schumer for all of his help in readying this important agreement today.”
“This settlement represents one of the first major blows against the types of predatory lending that were so prevalent in the mortgage business of the last few years. Appraisal fraud has left millions of Americans unable to afford their homes and has created a drag on the American economy. This agreement will reduce the conflicts of interest and economic incentives that made appraisal abuse and fraud so easy and attractive to lenders,” Senator Schumer said.
“Accurate, independent appraisals are very important to ensuring the safety and soundness of Fannie Mae and Freddie Mac and the mortgage market,” said OFHEO Director James Lockhart. “OFHEO is committed to working closely with fellow regulators, the Attorney General, Fannie Mae, Freddie Mac, appraisers, lenders and other market participants to assure that the roll-out of the new code builds upon best practices, recognizes constructive comments to identify further refinements, and avoids unintended consequences.”
“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. “As the nation’s leading purchaser of mortgage loans in the secondary market, Fannie Mae shares the interests of consumers in the integrity of the home valuation process, which is an important part of a well functioning market.”
“Accurate appraisals are fundamental to Freddie Mac’s effective credit risk management - as evidenced by our leadership in quality control programs and assistance with criminal prosecutions of mortgage fraud. The Code of Conduct announced today enhances the independence and accuracy of the appraisal process. And it builds on our company’s long-standing efforts to fight mortgage fraud by providing strong new protections for homebuyers, mortgage investors and the housing market. In addition, we look forward to working with the New York Attorney General, OFHEO, Fannie Mae and other mortgage market participants in launching the Independent Valuation Protection Institute. By funding the Institute, we are advancing the development and adoption of best practices in the appraisal process, ” said Freddie Mac Executive Vice President and General Counsel Robert Bostrom.
For more than a year, the Attorney General’s office has conducted an industry-wide investigation into mortgage fraud. On November 7, 2007, Cuomo announced he had issued Martin Act subpoenas to Fannie Mae and Freddie Mac seeking information on the mortgage loans the companies purchased from banks, including Washington Mutual, the nation’s largest savings and loan. The subpoenas also sought information on the due diligence practices of Fannie Mae and Freddie Mac, and their valuations of appraisals.
The subpoenas came on the heels of the filing of a lawsuit by the Attorney General against First American and its subsidiary eAppraiseIt. The lawsuit, announced on November 1, 2007, detailed a scheme in numerous e-mails showing First American and eAppraiseIT caved to pressure from Washington Mutual to use appraisers who provided inflated appraisals on homes. 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. Between April 2006 and October 2007, eAppraiseIT provided over 250,000 appraisals for Washington Mutual. The lawsuit is still pending, and the industry-wide investigation into mortgage fraud continues.
Kudos to Mr. Cuomo. He has addressed the root cause of the real estate debacle.
Posted by on 03/04 at 06:24 AM
Great, more Gov’t oversight. And how will an appraiser be chosen?? The ONLY way to prevent pressure on appraisers is to NOT give appraisers any #’s on refi’s and to NOT have appraisers review contracts on sales. This will eliminate pressure and result in fair appraisals. A random choosing of appraisers will result in a lower quality product as there are good and bad ones. Eliminates the need for appraisers to market, though!
Posted by on 03/04 at 10:38 PM
I’m sick of seeing appraisers blamed for this mess, appraisers did not cause the runup in values, DEMAND caused the runup, demand that was fueled be easy credit to unqualified borrowers. Values have dropped because money has been squeezed, loosen up the money to 2005-2006 levels and just watch values spring back to their peak levels again.
Kudos to A.G. Cuomo for trying to fix this mess, just point the finger in the right direction.
Posted by on 03/05 at 03:45 AM
This is the most important milestone in the fight against mortgage fraud. You don’t know how long appraisers (good, ethical appraisers) have been waiting for someone to step in and put an end to the enormous amount of lender pressure we (appraisers) endure on a regular basis. I agree 100% with the code and hope that its authors hold firm and make little or no changes before implementation on 1/1/09.
I find the reaction from the NMBA very interesting in that they feel this will put mortgage brokers out of business. Are they saying “if we can not control the appraisal/appraiser we will be out of business”?? That is the way I read their reaction.
D. Scott Murphy,SRA
D. S. Murphy & Associates
Appraiser for 25 years
Seated member of the Georgia Real Estate Appraisers Board
Posted by on 03/05 at 04:05 AM
Oh yes, lets be quick to lay blame on the APPRAISERS, yes some appraisers need to be sued and jailed for their “juicing” the value just to keep the lender happy. For the most it is NOT the appraisers fault, that our country is in trouble with the Mortg. problem. It is the Lenders, and they need to take full responsiblity for their greedy actions. I was a Branch Manager for a Mortg. Bank for 10 years I know how they are. The Mortg/lender has and still is getting away with fraud. The appraiser gets complaints turned in the the Board of Appraisal and it must be investigated, which is a good thing however, anyone can find an appraisal report in the trash, on the ground ect… and that person can turn in an appraiser for no reason, without disclosing their name. This is beginning to be a Witch hunt !!!!!!! Ok now if we have independant companies ordering the appraisals for the lenders, they will be in control in how much they will pay the appraiser for their work, and they are already starting to charge the appraiser $200-700 per year just to get on their list as approved appraiser, plus they charge for each report $7.50 - 15.00. These appraisal management companies are a scam, and they are cheating the good honest appraisers. This new idea will not work, as it will bankrupt the appraisal buisness. The HOTLINE mentioned, will be bombarded with calls, the FBI will be involved and for no reason, taking this way to far !!! Anyone can call and complain and some for no reason except jealousy, or a grudge. This is ridiculous and it will not work !
RP from Arizona
Posted by on 03/05 at 05:54 AM
ABOUT TIME SOMEONE DID SOMETHING ABOUT THIS, APPRAISERS ARE GOING TO BE ABLE TO DO THEIR JOBS THE RIGHT WAY WITHOUT LENDERS ASKING TO PUMP UP VALUES.
I WAS AT THE END OF MY ROPE WITH LENDERS ASKING ME TO MAKE HIGHER VALUES AND AS I DECLINED OVER THE PAST TWO YEARS I LOST OVER 80% OF MY WORK LOAD TO OTHER APPRAISERS THAT HAD NO PROBLEM WITH GIVING THEM WHAT THEY WANTED.
Posted by on 03/05 at 06:04 AM
I’m a commercial appraiser of pretty long experience. Does the world really need another appraisal regulatory body, this “Valuation Institute”? This will be overlaid on the Appraisal Institute and the other professional organizations; the state regulators; the Appraisal Foundation and Appraisal Subcommittee; and the bank regulators. As far as I can tell, it will only refer complaints to these other organizations, who seemingly haven’t done the job to date. Most of its funding will be eaten up by “coordination” memos and musty reports.
Other shortfalls in these agreements: mortgage brokers won’t be able to select appraisers, which is probably good; but that means the mortgage broker will likely have to identify a lender who will then select the appraiser. Now what happens if the appraisal comes in below or even above value and another lender’s program fits better? Can the appraisal be easily transferred to the appropriate lender? The borrower is now two hops from the appraisal order and will have a hard time moving the appraisal and his $400 investment.
Finally, the prohibition on using appraisers employed by the lender or AMCs controlled by the lender. Let me tell you, a lender can still exert a lot of pressure on an independent contractor. And in the notorious Washington Mutual case which started this investigation, WaMu didn’t own or control the AMC that agreed to “roll over” per one of its e-mails - that AMC was owned by a title company. The agreement announced to such fanfare wouldn’t have made any difference.
I’m not exactly sure what would guarantee appraisal independence but I don’t think these changes really do very much. BTW, in response to the previous comment, I don’t believe for a minute that poor appraisals were the “root cause of the real estate debacle.” They were a contributing factor, but not a “root cause.” For that I would look toward poor underwriting; ineffective consumer disclosures; the lack of agency or fiduciary relationships between mortgage brokers and “clients”; and pure fraud (e.g., no-doc “liar’s loans").
Posted by on 03/05 at 06:57 AM
Indeed, the root cause has been officially addressed… I hope this trend quickly spreads nationally so that the appraisers who have maintained dignity throughout this chaos finally get recognized for their dutiful commitment to integrity instead of being shunned for it.
Posted by on 03/05 at 07:33 AM
Unfortunately A.G. didn’t comment about the Consumers/borrowers who also wanted the “inflated” values to fund their dreams which have now have turned into nightmares. At least this is a step forward. Now maybe the regulators will make the banks pay for the appraisals instead of the borrowers, since the appraiser’s client is the bank not the borrower.
Posted by on 03/05 at 11:09 AM
As an honest appraiser for over 20 years, I can attest that the problem is not with appraiser’s who do not cave to lender pressures. The root of the problem is investors, buyers and sellers who are in the mortgage business for the purpose of gainintg wealth from the purchase, refinance, and sale of property. Too many so called mortgage people, so called loan officers, are in the business to obtain and/or provide fraudulent
loans. these people are very organized groups who have a circle of buyers, sellers, refinancers, loan officers, and appraiser’s. In regards to the appraiser’s, the fix is to increase the requirements for licencing. An require a lenghtly apprenticeship, college education (no exceptions)and a requirement for a mandatory appraisal review ordered by a government oversite agency or some entity other than the lender or mortgage company. As an experienced appraiser and reviewer, I am of the opinion that most of the borrowers “so called victims” are willing participants of the fraud process. They should not be called victimsand should be accountable for signing fraudulent documents suchs as made up leases, false owner occupancy statements, false income reporting, etc. etc. In most cases the term preditory lender, should be changed to preditory borrower, mortgage broker, and investor. These groups are already reeping the benifits of the crisis they have created. Now these same people through their organized groups, are now in the business of obtaining properties via short sales, and increasing their inventories waiting again to defraud this country by starting the process all over again. Appraiser’s are not the problem, the problem is fraud committed by these groups who have a participant become a “fraudulent appraiser”, fraudulant mortgage broker or loan officer, & fraudulent buyer, seller, and borrower participants. To solve the problem, many things have to happen, including holdong loan officers, and fradulent participants, accountable, criminally, for their actions with strict enforcement. Furthermore, appraisals completed for the mortgage broker should not be the appraisal relied on for any purchase of any loan in the secondary market. These companies should always have their own, independant appraisal completed in addition to the appraisal. The Dept. of H.U.D. had it right years ago by assigning their own “panel appraiser”. The opening of the roster to allow mortgage brokers to obtain their
own “FHA” appraisal was a bad dicision. If FHA/HUD utilized their own “independent” appraiser, The amount of inflated, or inaccurate appraisals would drastically be reduced. Appraisals
are necessary to prevent fraud in values, and conditions of properties. The problem lies with there being no competitive edge by being a good and honest appraiser. As always, the mortgage broker will just use someone else.
Posted by on 03/05 at 01:46 PM
As an appraiser, I welcome this move and hope it will accomplish the intentions of NY AG.
Posted by on 03/05 at 07:10 PM
This entire mess was not created by any one group but by all groups concerned some criminal and some not. I do believe that there will be many borrowers that will pay for appraisals that probably never should have been ordered in the first place. Think of the cals to the “Hotline” over that.
I have to say that this does baffle me a bit though Cuomo started looking into this because of irregularities in the AMC’s and it seems to me that this just plays right into the hands of these same AMC’s
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Rachel Dollar, the editor of Mortgage Fraud Blog, is an attorney and Certified Mortgage Banker who handles litigation for lending institutions and secondary market investors. She is an author and a nationally recognized speaker on the topic of mortgage fraud. Ms. Dollar is a shareholder with the law firm of 
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