As a Texas real estate and development attorney who has represented lenders, commercial borrowers and developers for years, and as someone who has been critical of the “band-aid” solutions to the sub prime delinquency problem proposed by some politicians, I am heartened when I see solutions that appear to actually address the problem. Recently, an article by Karen Freifeld and Sharon L. Lynch in Bloomberg reported that Fannie Mae and Freddie Mac have reached an agreement with Andrew Cuomo, New York’s Attorney General, regarding appraisal standards. The agreement provides that Fannie Mae and Freddie Mac will buy mortgages only from lenders that adopt new standards that are meant to make sure that appraisals for home mortgages are independent and objective. Specifically, the new standards would prohibit mortgage brokers from selecting the appraiser for a loan, and would also prohibit lenders from using in-house staff or lender-owned appraisal companies to do appraisals for home loans.
Fannie Mae and Freddie Mac are two federally chartered but privately operated organizations that buy real estate loans from banks. A large percentage of United States banks do not keep each home mortgage that they make for the full term of the loan. Instead, they sell their loans to Freddie Mac or Fannie Mae for a discounted amount of the full loan. Once the banks get paid by Freddie Mac or Fannie Mae, they can go out and make new loans with that money. Obviously, Fannie Mae and Freddie Mac are crucial to the liquidity of the United States mortgage industry. Banks will have to comply with standards set by Freddie Mac or Fannie Mae in order to sell loans to them.
From what I have read about the sub prime delinquency situation, inflated and even fraudulent appraisals appear to be at the heart of the current problem, just as they were for the Texas savings and loan debacle of the 1980’s. I suggest that the adoption on a national basis of the rules that are going into effect in New York will go a long way towards preventing the sub prime loan problems we see now.