NEW YORK — Mortgage giants Fannie Mae and Freddie Mac agreed Monday to take steps to combat inflated home appraisals, but critics doubted the changes would do much good.
In an agreement with New York Atty. Gen. Andrew Cuomo, the companies said they would purchase home loans only from lenders that follow new rules spelling out how home appraisals can be conducted.
The goal is to force lenders to get appraisals from independent experts who give objective and accurate valuations.
Though appraisers are supposed to be unbiased, critics say they are pressured to give inflated valuations by mortgage brokers and lenders who collect fees based on the dollar value of loans they make. Routine overstatement of home values contributed to the run-up in prices during this decade's nationwide housing bubble, the critics say.
"Today's agreement with Fannie Mae and Freddie Mac begins to set right what had gone so horribly wrong in the mortgage industry -- rampant appraisal fraud," Cuomo said. "The integrity of our mortgage system depends on independent appraisals."
Some appraisers, however, said the agreement, which takes effect at the start of next year, was unlikely to solve the problem.
Banks will continue to put unspoken pressure on appraisers to value homes at desired levels, said Bill King, owner of ValueOne Appraisal in Federal Way, Wash.
"It's going to be a long time before the fundamental way business gets done gets changed," King said.
And many appraisers still will do as banks and brokers ask because they want to keep getting hired, said Steve Smith, an appraiser in San Bernardino who has been critical of the industry.
"There are more ethical appraisers who have been put out of business than there are appraisers who remain in business," Smith said.
The American Society of Appraisers praised the accord but said the ban on all in-house appraisals could penalize honest appraisers who work for banks.
Fannie Mae and Freddie Mac are government-chartered companies that buy mortgages from lenders, freeing the banks to make many more loans than if they kept the debt on their books.
Under the accord, Fannie Mae and Freddie Mac agreed not to purchase loans from banks that use their own employees or affiliated companies to conduct appraisals. Mortgage brokers also would be barred from selecting appraisers.
Fannie Mae and Freddie Mac also agreed to pay $24 million to fund an oversight board to monitor compliance with the agreement. The new body would operate a hotline for homeowners and appraisers to lodge allegations of wrongdoing.
Cuomo subpoenaed the two housing-finance companies in November as part of a year-long investigation of mortgage fraud.
In November, Cuomo filed a civil suit accusing a home-appraisal unit of Santa Ana-based First American Corp. of inflating the value of homes, thereby encouraging consumers to pay too much for them or to borrow against equity they didn't have.
First American overstated home values at the behest of home lender Washington Mutual Inc., according to the suit, which is still pending. First American and Washington Mutual have denied wrongdoing.
Shares of Fannie Mae and Freddie Mac slumped Monday, as did the stocks of most mortgage lenders. Fannie Mae fell $1.21, or 4.4%, to $26.44. Freddie Mac was down $1.46, or 5.8%, to $23.72.