Fannie, Freddie Set Stricter Appraisal Rules

Fannie Mae and Freddie Mac announced an agreement with New York Attorney General Andrew Cuomo to discourage inflated appraisals by enforcing new standards in the home-mortgage market. Seeking to head off the threat of lawsuits from Mr. Cuomo, the two government-sponsored providers of funding for mortgage loans agreed to a code of conduct due to take effect next Jan. 1. Because Fannie and Freddie are the dominant sources of funds for home loans, the code will become an effective standard for the industry. The code bars lenders and their representatives from pressuring appraisers to supply inflated estimates of property values, which are widely viewed as an important contributor to the mortgage crisis. Appraisers have long complained that they risked losing business if they didn't appraise homes at values that would allow loans to be made. Bank employees who are involved in making loans won't be allowed to choose appraisers. And lenders won't be able to make loans on the basis of appraisals from their own employees or from other companies they control. The code also bars lenders from using appraisals ordered by mortgage brokers. The National Association of Mortgage Brokers said that rule could drive many brokers out of business. Officials of the trade group said appraisals ordered by brokers sometimes can be used for more than one potential lender, giving the consumer more flexibility. Under the new code, they said, consumers who use brokers might end up paying for two appraisals. Mr. Cuomo said he didn't believe the code would hurt brokers who follow "legitimate" practices. An inflated appraisal can cause lenders to advance more money than a house is worth, exposing both lender and borrower to losses, especially when home prices fall.