New Fannie Mae Rules to Prevent Inflated Appraisals

 In February, Fannie Mae, the largest source of financing for U.S. home loans, announced that it will work to ban their use of in-house appraisals. An “in-house appraisal” means that the appraisal is conducted by brokers’ employees or by appraisers who are arranged by brokers. Appraisals will now need to be conducted by appraisers who are independent and do not have a conflict of interest. This development has the potential to decrease fraudulent appraisal activity.

Apparently, approximately three-quarters of residential mortgage appraisals are arranged through brokers who only get paid if a loan closes, which creates a financial incentive for mortgage brokers to push appraisers toward higher valuations. Higher appraisals can also contribute to economic instability because homeowners can qualify to refinance their homes and borrow cash against them.

The announcement came in response to a yearlong mortgage investigation by New York Attorney General Andrew Cuomo. Fannie Mae has agreed with the Attorney General of the State of New York and the Office of Federal Housing Enterprise Oversight to assist the regulators in their efforts to enhance home appraisal practices on behalf of consumers. The New York Attorney General’s office also announced it has terminated its inquiry of Fannie Mae, which began in November 2007.

Fannie Mae also will take two steps to assist the regulators in their efforts to enhance the quality and independence of the appraisal process. First, to help ensure appraisal independence and valuation protection, Fannie Mae will adopt a Home Valuation Protection Code, which will establish requirements governing appraisal selection, solicitation, compensation, conflicts of interest, and corporate independence, among other requirements. Additionally, Fannie Mae will provide $12 million over five years to help establish an Independent Valuation Protection Institute, which will monitor and study the area of home valuations.

By: Present Value

Tags: Fannie Mae, In-house Appraisal, Real Estate, Real Estate Appraisal
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