Fannie And Freddie Under Fire

It was announced earlier this week that New York State Attorney General Andrew Cuomo is investigating Fannie Mae and Freddie Mac in relation to accusations that the two mortgage giants had purchased loans based on inflated appraisals from Washington Mutual. According to Cuomo, WaMu pressured eAppraiseIT, an appraisal company, to inflate home values on thousands of loans which were later sold to Fannie and Freddie. Freddie Mac replied immediately saying it will cooperate with investigators. WaMu and eAppraseIT said they did not breach regulations. WaMu’s stock price dropped 17% on the news, to the lowest level in 20 years.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), the GSEs’ regulator, however, expressed disappointment with the subpoenas. In a letter to Cuomo, he said that Fannie and Freddie “have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals”, and “you and your staff may not fully understand the differences between the mortgage-backed securities issued by the GSEs and those issued by other entities”. I can feel the rage.

Fannie and Freddie have operating rules in place, which say that if the loans they purchase are linked to inflated appraisals, the lender has to buy them back. Too bad for WaMu, it’s already suffering losses from failed subprime loans, so if it has to repurchase all the mortgages it sold to Fannie Mae and Freddie Mac, its financial situation could deteriorate further. For the time being, both companies are continuing to purchase WaMu mortgages.

Appraisers forced to distort numbers

With the spring/summer home buying season on the verge of beginning, problems associated with Real Estate fraud and data falsification become more pressing.

A recent survey pointed out that 90% of appraisers have been pressured to raise property valuations. The survey was conducted by October Research and involved 1, 200 appraisers from all the 50 states, District of Columbia and Puerto Rico. An identical survey was carried out in 2003, when only 55% of appraisers admitted they’d been pressured to adjust the results of their valuation.

With home prices sliding, everyone in the industry is trying to work out a better deal, and an appraiser may lose the assignment if he/she refuses to cooperate. Mortgage brokers and agents are listed as the top sources of pressure, but sellers, lenders and even buyers have also been reported to attempt to influence the final results.

If an appraiser’s estimate is considered unsatisfactory, customers may refuse to work with him/her and some appraisers fear they might lose their positions. Loan brokers are constantly calling appraisers asking if a certain property’s worth can be evaluated at the sales contract price; and if a lower number is arrived at, the appraiser may not get paid for the work.

Most appraisers refuse to knowingly submit inflated valuations, but the real solution is probably a legislative measure that would make forcing appraisers to inflate or otherwise adjust estimations illegal.