WASHINGTON A mandate to split the U.S. home loan and home appraisal industries would needlessly damage those sectors and endanger the two largest U.S. sources of mortgage finance, appraisal and lending trade groups said on Wednesday.
The plan in question calls for Fannie Mae and Freddie Mac only to finance home loans from lenders that have put their appraisers at arm's length.
The mortgage finance giants agreed to those rules as part of a March deal with New York Attorney General Andrew Cuomo to end an investigation into whether the government-sponsored enterprises (GSEs) had allowed inflated home valuations.
On Wednesday, the Mortgage Bankers Association (MBA) and a confederation of appraisal groups outlined their opposition to a plan they called burdensome and wrongheaded.
The deal "could eliminate many of the strongest protectors of the (mortgage underwriting) process: namely, competent, unbiased real estate appraisers," reads a letter signed by the Appraisal Institute and three other home valuation groups.
In its own letter, the MBA said the plan could "present safety and soundness risks to the GSEs and financial institutions generally."
The letters were directed to Fannie Mae and Freddie Mac, and their federal regulator, the Office of Federal Housing Enterprise Oversight.
Under the agreement with Cuomo, the companies and OFHEO are charged with overseeing the plan and they accepted outside comment on the deal through the end of April.
Federal banking regulators, too, have expressed misgivings about the sweeping plan that has the potential to rewrite conventions across the mortgage industry.
Comptroller of the Currency John Dugan has said the deal is flawed and will unduly burden mortgage companies.
"It is not clear that the appraisal function should be outside the institution," Dugan said in a speech this month.
While Cuomo has said mortgage lenders and appraisers were at times too cozy, Dugan said appraisers affiliated with a mortgage lender can bring a level of quality control that might not exist with a third-party institution.
"I don't think you can address all the issues with a blanket prohibition like that," Dugan said.
Cuomo said in a statement the agreements were aimed at "restoring integrity to this crucial market," which he said was "broken."
"The overwhelming response to the agreement has been a positive one, with almost everyone agreeing that significant reform is needed," he said. "It is not surprising that current industry participants, many of whom have significant economic interests of their own at stake, have differing perspectives."
Under the deal, Fannie Mae and Freddie Mac agreed to spend $24 million to jump-start a new appraisal oversight body and incorporate the new standards by the beginning of next year.
Regulatory and mortgage industry sources said they hope to at least strip out some of the most objectionable parts of the plan in coming months.
Since Wall Street gladly bought and bundled home loans for investors during the housing boom, lenders may have felt more comfortable inflating loan amounts. Before the deal, Cuomo filed subpoenas against Fannie Mae and Freddie Mac to determine whether the companies stood by as that happened.
The new code will prohibit mortgage brokers from selecting a home appraiser, while lenders may not use in-house assessors for initial reports on the value of homes.