Fannie Mae (NYSE: FNM) has announced a settlement that ultimately looks like will give the company a huge sigh of relief. It has entered into an agreement with the New York Attorney General and OFHEO (the Office of Federal Housing Enterprise Oversight) to assist the regulators in their efforts to enhance home appraisal practices on behalf of consumers.
The New York Attorney General’s office has also terminated its inquiry of Fannie Mae, which began in November 2007 as part of the Attorney General’s complaint against First American Corporation regarding that company’s appraisal practices. Fannie Mae is basically getting out of the appraisal woes almost scott free. It will take two steps "to assist regulators to enhance the quality and independence of the appraisal process":
- First, Fannie Mae will adopt a Home Valuation Protection Code to help ensure appraisal independence and valuation protection. This code will establish requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence, among other requirements. Fannie Mae will subsequently adopt this new code immediately, and make appropriate changes to its sellers guide to reflect the changes. As of January 1, 2009, Fannie Mae will require that lenders represent and warrant that appraisals prepared in connection with mortgage loans originated on or after that date that are delivered to Fannie Mae conform to the Code.
- Fannie Mae will also provide $12 million over five years to help establish what it calls an "Independent Valuation Protection Institute" to monitor and study the area of home valuations. So the net result is that it will fund a study for $2.4 million per year in a make-work project that will tell them that "valuations" and appraisals from 2003 to 2008 came in at prices that were far too high; and they will probably realize that some folks were playing appraisal games.
The Institute will establish a telephone hotline for consumers to contact "if they believe the appraisal process has been tainted or if they believe they have been harmed by appraisal fraud." Appraisers also will be able to contact the Institute if they believe their independence has been threatened in any way. If you think about this so far after the fact, it’s really a wonder who this is really for and ultimately who it will benefit after the fact. Hopefully that call center won’t be based in India. Fannie Mae also noted that while the New York Attorney General office has concluded its inquiry, it will continue to work with the New York Attorney General and OFHEO on appraisal practices. Good luck.
The long and short of this is pretty simple. There were major appraisal games that were played from top to bottom and start to finish. If you went through a home purchase, refinancing, or used your house as a personal piggy bank for home equity from 2003 to 2006, you already know this. It sounds like Fannie Mae just won a cheap public relations coup over something that could have been a source of ugly headlines for years to come.
Jon C. Ogg
March 3, 2008