Real Estate & Property Law

N.Y. Mortgage Appraisal Probe Spotlights Fannie Mae & Freddie Mac

Updated: New York’s top law enforcement officer obviously isn’t afraid to take on the big guys.

Having filed suit last week against one of the nation’s biggest mortgage lenders over an alleged scheme to promote inflated appraisals, in alleged violation of lending regulations, state Attorney General Andrew Cuomo is now exerting his influence on even bigger mortgage-market players—Fannie Mae and Freddie Mac, the nation’s biggest mortgage purchasers. He has asked the two, as the Wall Street Journal (sub. req.) puts it, “to examine to what extent mortgage loans they own or have guaranteed are tainted by inflated appraisals.”

In the process, he has subpoenaed both Fannie Mae and Freddie Mac to seek information about the Washington Mutual loans they purchased, and is calling for an independent examiner to investigate their operations related to WaMu, reports the Washington Post.

Spokesmen for the government-backed secondary-mortgage-market megaliths say they, too, are concerned about the issue and will cooperate fully with Cuomo’s investigation of inappropriate appraisal practices, the newspaper reports.

“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,” said Brian Faith, managing director of communications, in a written statement. “We intend to cooperate fully with the attorney general.” A Freddie Mac representative made similar comments.

As the nation’s biggest mortgage investors, Fannie Mae and Freddie Mac routinely purchase mortgages from the initial lenders, holding some and securitizing others into bundled packages that the two guarantee and sell in shares to investors worldwide. “Unrealistic appraisals,” the Wall Street Journal notes, “would provide a false idea of the collateral backing those loans.” In addition to potentially harming shareholders, the claimed appraisal inflation also hurt homeowners, according to Cuomo.

An earlier post discusses the appraisal-scheme suit that Cuomo filed last week in state court in Manhattan. Although it involves Washington Mutual mortgages, WaMu is not a defendant in that litigation.

(Updated at 7:16 p.m., CST.)

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