WASHINGTON — Property appraisers have been warning about it for a decade, and the real estate market is reaping the whirlwind: The price declines under way across the country are partly the result of systemic, intentional overvaluations on home appraisals, many at the behest of loan officers illegally influencing or threatening appraisers to "hit the number" needed to close the deal.
But if an extraordinary new legal settlement has its intended effect, that system will be changed radically in the coming months.
• Most lenders won't be able to fund new mortgages without guaranteeing that the underlying property valuations are free of influence or pressure, and fully conform to a new national quality code for appraisals.
• Appraisers and consumers will have new complaint hotlines to report any of a long list of prohibited forms of appraisal interference by loan officers, realty agents and others.
• Lenders who have in-house appraisal staffs or who have financial interests in appraisal management companies won't be allowed to use valuations generated by those services if they want to sell loans into the secondary mortgage market.
• Mortgage brokers, who originate an estimated 50 to 60 percent of all home loans, will be cut out of the appraiser selection process altogether.
• National oversight of home real estate appraisals will be turned over to a new Independent Valuation Protection Institute that will monitor the accuracy of home appraisals and automated valuations, receive and mediate complaints, or forward them to federal and state regulators.
These and other sweeping changes are contained in a settlement among the two congressionally chartered mortgage investors (Fannie Mae and Freddie Mac), the attorney general of New York, and the federal agency that oversees Fannie and Freddie.
The settlement terms are still open to comment from the mortgage industry and general public, but the core quality standards for appraisals already are in effect for loans delivered to Fannie or Freddie. The entire agreement is scheduled to take full effect Jan. 1.
Many consumers might ask: What's the big deal here? Aren't accurate appraisals in everybody's interest and long overdue? Absolutely. But in several ways, the new agreement is unprecedented. Fannie Mae and Freddie Mac are federally regulated corporations, answerable to Congress. Normally they don't kowtow to state governments.
But using a 1921 securities fraud law that is unique to his state, New York Attorney General Andrew M. Cuomo brokered an agreement that transcends the normal reach of state governments, one that could eventually touch almost every home mortgage transaction nationwide.
Late last year, Cuomo began an investigation of potential appraisal fraud in the portfolios of Fannie Mae and Freddie Mac. With what he considered evidence of appraisal problems generated by a separate suit involving a major seller of loans to Fannie and Freddie, Washington Mutual Inc., Cuomo began negotiations with the two companies and their federal regulator, the Office of Federal Housing Enterprise Oversight, known as OFHEO.
Cuomo never announced what, if anything, he found amiss inside Fannie and Freddie. In the settlement agreement, both companies denied any wrongdoing. First American Corp.'s eAppraiseIT subsidiary, accused by Cuomo of inflating appraisals under pressure from Washington Mutual, also denied wrongdoing, as has Washington Mutual.
Whatever the causes, Fannie and Freddie agreed to overhaul their appraisal standards and practices, signed on to a detailed home valuation code of conduct covering all their mortgage activities, and committed to pay $24-million in the next five years to create and staff the independent institute that will oversee appraisals nationwide.
Federal banking regulators are expected to adopt parallel reforms, effectively extending the agreement's reach far beyond Fannie and Freddie to banks, thrift institutions and credit unions.
Mortgage brokers are incensed at what they consider their unfair treatment in the settlement, as are some large lenders who have financial interests in appraisal management firms.
Roy DeLoach, executive vice president of the 25,000-member National Association of Mortgage Brokers, said the group is exploring legal action because the settlement, which he says amounts to "a de facto regulatory action by OFHEO," failed to follow federal procedural rules.
In an interview, DeLoach also demanded that settlement parties reveal the findings of the investigations into Fannie and Freddie. Referring to the matter as "appraisergate," he asked, "What did Cuomo find? How does it relate to brokers? Have they gone after appraisers who submitted inflated valuations? Those are the real questions here."
Without a federal court order, don't count on answers to these questions soon from any of the parties to the settlement. In the meantime, a new era of independent, better appraisals just might be on the horizon.
E-mail Kenneth R. Harney at