Posted on 11/07/2007 10:53:53 AM PST by Brilliant
New York Attorney General Andrew Cuomo said Wednesday that he has issued subpoenas to government-sponsored lenders Fannie Mae and Freddie Mac in his investigation into what he claims are conflicts of interest in the mortgage industry.
Cuomo said he wants to know about loans Fannie Mae and Freddie Mac purchased from banks, including Washington Mutual Inc. The subpoenas also seek to find out how the government-sponsored companies handle appraisals.
Cuomo said Fannie Mae and Freddie Mac have agreed to his demand that an independent examiner, subject to the attorney general's approval, review all Washington Mutual appraisals and mortgages done with the two government-sponsored lenders.
"In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals," Cuomo said.
"Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender's interest," Cuomo said. "Knowing this, Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals."
Fannie Mae and Freddie Mac were created by Congress to make home ownership affordable for low- and middle-income people.
"If true, the appraisal practices described in the complaint would violate Fannie Mae's requirements for loans we purchase from lenders or securitize," said Brian Faith of Fannie Mae.
"It is against our interest to purchase or guarantee mortgages with inflated appraisals, and so it is in Fannie Mae's interest that these appraisal practices be investigated," he said. "If the examiner determines we own or guarantee mortgages with inflated appraisals, our guide states that the lender must buy back the loans that do not meet our standards and requirements.
Fannie Mae and Freddie Mac companies pump money into the nearly $11 trillion home-loan market by buying blocks of mortgages from lenders and then packaging them into securities for sale to investors.
"We are pleased to cooperate with the New York attorney general's investigation and have agreed to appoint an independent examiner as requested," said Doug Duvall, spokesman for Freddie Mac. "We depend upon accurate appraisals. In fact, accurate appraisals are fundamental to our effective credit-risk management as well as to the long-term success of homebuyers."
James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, said he will discuss the issue with Cuomo.
"OFHEO has supported cooperation by Fannie Mae and Freddie Mac with law enforcement at all levels," Lockhart said. "In particular, for the past three years, we have worked with the government-sponsored enterprises to enhance their programs to combat mortgage fraud and to provide outreach to their seller-services on best practices."
On Tuesday, the federal government reached a $16.4 million settlement with Freddie Mac's former CEO for his role in the company's multibillion-dollar accounting scandal.
In 2004, massive accounting problems were found at its government-sponsored sibling, Fannie Mae, and that company's chief executive, Franklin Raines, also was forced out.
In afternoon trading, Fannie Mae shares, which are down nearly 7 percent for the year amid the subprime crisis, were down $4.74, or 8.6 percent, to $50.65.
Freddie Mac shares were trading at $46.92, down $2.47 or 5 percent from its opening price. The stock has fallen more than 27 percent for the year.
Cuomo's announcement comes less than a week after the attorney general filed suit against a major real estate appraisal company, accusing it of colluding with the nation's largest savings and loan companies to inflate the values of homes, thus contributing to the subprime mortgage crisis.
Cuomo last Thursday announced a lawsuit against eAppraiseIT that accuses the First American Corp. subsidiary of caving in to pressure from Washington Mutual to use a list of "proven appraisers" who he claims inflated home appraisals.
Washington Mutual, which was not targeted in the suit, cut ties with eAppraiseIT the following day.
Fannie Mae is down nearly 10%. The mortgage industry doesn’t need this right now.
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