Fannie, Freddie agree to new appraisal standards

By Patrick Rucker

WASHINGTON (Reuters) - The two largest sources of U.S. mortgage financing agreed on Monday to sponsor a new home appraisal watchdog to prevent inflated home values.

Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) will uphold a new code of conduct meant to keep mortgage lenders at arm's length from home appraisers and will also spend $24 million to jump-start the new oversight body in a deal to prevent lawsuits from New York Attorney General Andrew Cuomo.

Starting January 1, 2009, the government-sponsored enterprises will buy home loans only from lenders that endorse an appraiser code of conduct that Cuomo said he hopes will become an industry standard.

"This is one of the greatest, most dramatic reforms of the housing industry in the last 20 years," Cuomo said at a press event in New York announcing the deal. "We believe as a group that this will be a significant and dramatically positive reform."

Since Wall Street gladly bought and bundled home loans for investors during the housing boom, lenders may have felt more comfortable inflating loan amounts. Cuomo filed subpoenas against Fannie Mae and Freddie Mac to determine whether the companies stood by as that happened.

The new code will prohibit mortgage brokers from selecting a home appraiser, while lenders may not use in-house assessors for initial reports on the value of homes. In another provision of the settlement, Fannie Mae and Freddie Mac will each provide $12 million over the five years to help establish an appraisal oversight body.

The companies' federal regulator, the Office of Federal Housing Enterprise Oversight, will host the new watchdog group, which will maintain a consumer hotline and promote appraiser independence.

The new standards will help break long-standing business practices under which lenders often had close ties to home appraisers, said David Berenbaum, an executive with the National Community Reinvestment Coalition.