June 2, 2008
By Kenneth R. Harney
One of the country's top financial regulators threw a hand grenade last week at Fannie Mae's and Freddie Mac's controversial plan to radically overhaul real estate appraisals.
Mortgage industry groups in Washington think the regulator -- Comptroller of the Currency John Dugan -- scored a direct hit.
Dugan sent a sharply-worded 12-page letter to Fannie and Freddie's regulator - the Office of Federal Housing Enterprise Oversight (OFHEO) -- effectively warning it to pull the plug on the appraisal changes or face litigation and possibly Congressional action.
The appraisal plan, unveiled in March, was itself a legal settlement among Fannie Mae, Freddie Mac and New York Attorney General Andrew Cuomo. The plan would force lenders to stop using in-house staff appraisers or appraisers affiliated with management companies in which the lenders have financial interests.
It would also prohibit all mortgage brokers from selecting appraisers for home mortgage valuation assignments.
Cuomo extracted the settlement from Fannie and Freddie after threatening an investigation of both companies' appraisal practices. Rather than submit to subpoenas of staff and documents, the two companies agreed to far-reaching changes in their appraisal rules - essentially dictated by Cuomo -- that would affect all banks and lenders seeking to sell Fannie and Freddie mortgages.
OFHEO signed onto the agreement as well.
Mortgage groups immediately criticized the settlement as unfairly intrusive and harmful to long-standing, legitimate business relationships between appraisers and lenders.
Dugan, the principal supervisor of thousands of national banks, told OFHEO in his letter that provisions of the National Bank Act would prevent this de facto regulation from being applied to, or enforced against any of the institutions regulated by his agency.
We see no legal basis, he added, for delegating regulatory authority to the New York Attorney General. Other officials hinted that Dugan's letter could be the basis for future suits to block the appraisal plan from taking effect as scheduled next January 1.
Steve O'Connor, senior vice president for government affairs for the Mortgage Bankers Association of America, called Dugan's letter significant and a powerful statement that could help derail the plan.
In the meantime, Cuomo, Fannie and Freddie are saying little publicly about Dugan's warning. Cuomo's office said it is thoughtfully considering all criticism from the industry and government agencies.
But no one expects Cuomo to back down.
Where's this all headed? Probably to federal court. And maybe to Congress, where legislation already is pending that would reform appraisal standards for all lenders, and impose stiff penalties on banks, mortgage companies and brokers who interfere -- or attempt to interfere -- with appraisals.