Seeking to avoid multiple lawsuits by New York Attorney General Andrew Cuomo, the two also agreed to a code of conduct to take effect January 1, 2009, The Wall Street Journal reported Tuesday (subscription required). Further, as the largest purchasers of mortgages, the code will become the effective new standard for the U.S. mortgage industry.
The new code bars lenders from using appraisals ordered by mortgage brokers, and also bars them from pressuring appraisers to supply inflated estimates of property values, which many believe were a major factor in the mortgage crisis.
Fannie Mae fell $1.44 to $24.95, while Freddie Mac fell $1.85 to $21.86 on Tuesday at mid-day. However, it should be noted that U.S. Federal Reserve Chairman Ben Bernanke also recommended that lenders forgive a portion of money owed by home owners at risk of foreclosure, a policy proposal that undoubtedly sparked additional selling of FNM's and FRE's shares Tuesday.
Sector Analysis: With the caveat that the new appraisal organization's oversight powers haven't been evaluated yet, if the organization is empowered and truly independent, it will go a long way toward addressing one of housing market's excesses: inflated or false appraisals. The inherent conflict of interest in the former system was obvious enough; with their fees tied to mortgage approval, and mortgage approvals frequently hinging on LTVs (loan-to-value ratios), mortgage brokers and lenders pressured appraisers to inflate property values, in some cases by 30% or more above fair market values.Further, so long as the housing market was booming, with double-digit real appreciation rates, few regulators seemed to care. But then the housing boom ended, and consequences were revealed: many homeowners could not refinance out of problematic mortgages because market value were nowhere near appraisal values. This sad reality comprises a major component of the high level of foreclosures. Hence, if the new appraisal oversight organization can keep appraisals accurate -- i.e. reflecting market value -- the nation will have deployed a safeguard against a repetition of the same error in the next housing boom.
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