As you know, I was out sick all last week, so I have a lot of pent up "bloggage."
This morning NY Attorney General Andrew Cuomo announced a deal with Fannie and Freddie and OFHEO to change the way the whole appraisal system works. No question, this is a good thing. Over-inflated appraisals fuelled unsustainable price appreciation during the housing boom, and those appraisals are, I believe, at least 80 percent to blame for the current predicament the credit market is in.
Lenders, brokers, bankers, etc. pressured appraisers to raise the value of homes so that deals would go through and mortgages would be made for ridiculous amounts. I recently interviewed a high-level appraiser who told me this was totally commonplace, that appraisals during the boom were about as real as the hairy three-eyed monster that lurks in my son’s closet, and very much more dangerous.
Under the new agreement, Fannie and Freddie will not buy loans from brokers who select their own appraisers or lenders who use in-house appraisers or lenders who use appraisal management companies that they own or control. The deal also sets up the “Independent Valuation Protection Institute,” which will monitor the new deal (or “code” as it seems to be called). Fannie and Freddie will pay $24 million to set that up. The Institute will have a hotline for consumers and appraisers alike, it will report publicly on its activities and appoint a board of directors.
My question is: Why did it take the NY State Attorney General to do this? Why did Federal regulators allow these practices to go on commonplace for so long? I can’t imagine Fannie and Freddie wanted to spend all this money to do this, but clearly they had to fix the appraisal market themselves, since regulators wouldn’t. Good for them for agreeing to it and taking a stand, no matter how painful!