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Fannie, Freddie Hammered As N.Y. Expands Probe

New York Attorney General Andrew Cuomo's expanding probe of the $10 trillion U.S. home mortgage industry hammered the stocks and bonds of Fannie Mae and Freddie Mac as he prepared to subpoena records of the mortgage finance companies.

The subpoenas seek information on the mortgage loans that the two government-chartered companies purchased from banks, including Washington Mutual, Cuomo said. He also
said the companies have agreed to a demand to retain an independent examiner to review of all Washington Mutual appraisals and mortgages purchased by the companies.

"In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals," the attorney general said in a statement.

Washington Mutual is one of the biggest suppliers of mortgage assets to Fannie Mae and Freddie Mac, who use the loans as collateral for the $4 trillion in mortgage-backed
securities they issue. Fannie Mae and Freddie Mac business has soared to record levels in recent months as lenders strapped by the credit crunch find them the only remaining outside funding source for U.S. mortgage originations.

Investors crushed shares of the companies, sending Fannie Mae down 10.1 percent to $49.79, the lowest since August 2006. Freddie Mac shares crumbled 8.6 percent to $45.13, the lowest
since September 2000.

Yield spreads on the corporate debt obligations issued by Fannie Mae and Freddie Mac widened by 0.07 percentage point to U.S. Treasuries, a steep move in a market whose yields rarely
vary from government markets by more than 0.02 point a day. The cost to insure debt of the companies also jumped, indicating doubts of the companies' creditworthiness.

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The subpoenas also seek information on the due diligence practices of Fannie Mae and Freddie Mac, and their valuations of appraisals, he said.

Fannie Mae and Freddie Mac statements said they would cooperate fully with Cuomo's probe.

"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," the company said.

"Accurate appraisals are fundamental to our effective credit risk management as well as to the long-term success of homebuyers," Freddie Mac said. "We therefore work closely with
our lenders to ensure that all loan information is accurate."

Last week, Cuomo sued First American Corpand one of its units for allegedly colluding with WaMu to inflate the appraisal values of homes. WaMu, the largest U.S. savings and loan, was not named as a defendant, but investors dealt a punishing 16 percent blow to its shares on Wednesday. Late afternoon it was trading down 16.3 percent at $20.27.

The First American lawsuit, brought in New York Supreme Court, alleged that the company and its real estate appraisal subsidiary, eAppraiseIT, violated appraiser independence laws.

The developments are the latest outcomes of a nine-month probe into the mortgage industry by Cuomo, who was Secretary of the Department of Housing and Urban Development under
President Clinton.

The New York attorney general's office has sent hundreds of subpoenas and has uncovered "fundamental flaws" in two areas -- appraisals and securitization of mortgage loans, officials have said.

Fannie and Freddie are known as government-sponsored enterprises because the publicly traded firms also hold federal charters to add liquidity to the homes market and contribute to
affordable housing.

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