Appraisal-Gate Gains Momentum; NY AG Subpoenas Fannie, Freddie

In a year where mortgage market problems, the spectre of Federal legislation, and lender implosions generated headlines, the appraisal fraud issue being pursued by New York Attorney General Andrew Cuomo may end up being the mortgage industry’s single largest story of 2007 — or the last ten years.

Cuomo’s office this morning said it sent Letters of Notice and Demand, providing notice of the issuance of Martin Act subpoenas and a demand for an Independent Examiner, to the nation’s two largest financiers of home mortgages, Fannie Mae and Freddie Mac. The AG said he is looking for information regarding the mortgage loans Fannie Mae and Freddie Mac purchased from banks, including Washington Mutual (but not limited to just Washington Mutual - and this is important to note).

Cuomo is looking for information on the appraisal practices used on the loans purchased by the GSEs, and is also seeking information on the due diligence practices of each GSE.

It shouldn’t be surprising that at least one GSE - Fannie Mae - quickly put out a press statement that in no subtle way positions the GSE as an innnocent bystander:

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. The Attorney General has indicated that he also plans to subpoena Fannie Mae for documents and testimony related to the appraisal process. We intend to cooperate fully with the Attorney General. We also will appoint, with the Attorney General’s approval, an independent examiner to review the appraisal practices cited in the complaint. 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.

As I noted when I first blogged on this, I can’t comment on the merits of this case — but I can say that I’ve received numerous emails from attorneys in the field noting that a settlement here isn’t remotely the same thing as a settlement associated with regulatory action by, say, an Insurance Commissioner.

In other words, this is a very big deal^®; the fact that the investigation is being expanded to essentially the entire industry is very big news. Imagine the buybacks this could drive if it has any merit.

From the AG’s press statement:

“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,” said Attorney General Cuomo. “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. 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.” …

“I wish I could say I am shocked by the discoveries made by the Attorney General and his staff. Sadly, what allegedly happened between First American and Washington Mutual is not an isolated incident. Rather, it is symbolic of a problem that has plagued the appraisal industry for years,” said Terry Dunkin, President of the Appraisal Institute. “As the allegations against First American show, the mortgage industry’s dirty secret has been that banks exert tremendous pressure to extort appraisers.”

I’m somewhat surprised to see the Appraisal Institute chiming in publicly on this, actually.