February 27, 2008 / 9:41 PM / 11 years ago

Fannie, Freddie appraisal deal slips but lives on

WASHINGTON (Reuters) - Two days before his company announced multibillion dollar losses on mortgage investments, Fannie Mae FNM.N chief executive Dan Mudd was on an unscheduled trip to New York to bless a deal that would have reshaped the home appraisal industry.

When he left New York Attorney General Andrew Cuomo’s offices empty handed on Monday after his top lawyer finished a marathon negotiations with his chief competitor and two regulators, Mudd might have gotten a lesson on the vagaries of unraveling the current crisis in mortgage finance.

While this week’s negotiations fell flat, sources close to the talks say a deal could still get done by early next week.

Fannie Mae was willing to sign on to a plan Cuomo was pushing that would put lenders at arms length from home appraisers, but a last-minute balk by its main regulator put the deal on ice, the sources said.

Because Wall Street gladly bought and bundled home loans for investors during the housing boom, lenders may have felt more comfortable inflating loan amounts and Cuomo is investigating whether Fannie Mae and Freddie Mac, its industry cousin, stood idle as that happened.

Freddie Mac FRE.N, which competes with Fannie Mae in the home financing business, was also prepared to go along with the plan to eliminate Cuomo’s threat of lawsuits but the accord now faces an uncertain future.

“This was not a ribbon-cutting. It would have been an industry-altering announcement. I think people realized that they were potentially going off half-cocked,” said one source familiar with the negotiations.

Because they are the nation’s top two sources of mortgage finance, policy changes at Fannie Mae and Freddie Mac can alter conventions across the industry.

The failed talks exposed mortgage industry turf wars among regulators and the network of competing industry interests that underpin today’s home loan sector. They also point to the difficulty of overhauling a mortgage market whose weaknesses have come into plain view with the collapse of the U.S. housing market.

SEEDS OF A DEAL

The seeds of Monday’s bargaining session were planted in early November when Cuomo filed subpoenas against Fannie Mae and Freddie Mac as part of his wide-ranging investigation into the mortgage industry.

That move upset the companies’ federal regulator, the Office of Federal Housing Enterprise Oversight, which at first warned New York’s top lawyer to backoff. In time, Cuomo was able to smooth ruffled feathers to the point where OFHEO’s Director James Lockhart endorsed the deal that circulated before Monday’s meeting, said several sources familiar with the talks.

Lenders wishing to sell their mortgages to the nation’s two largest sources of home finance would have to make sure they did not rely on in-house appraisers and take other steps to encourage untainted home valuations, according to the plan.

Fannie Mae had already notified its lenders that the new policy was coming and Mudd traveled to New York to stand side by side Cuomo and New York Sen. Charles Schumer at a planned press conference to formally announce the deal.

For several hours over bagels and coffee in Cuomo’s Manhattan offices, Fannie Mae counsel Beth Wilkinson worked through details of the plan alongside Alfred Pollard, the OFHEO general counsel, and Robert Bostrom, Freddie Mac’s top lawyer. Schumer and James Lockhart were patched in occasionally by phone. But soon trouble spots emerged in the deal.

Federal bank regulators, who had a role in setting standards for home appraisers, warned OFHEO that a deal with the two mortgage finance giants could suddenly reshape the industry in unexpected ways. Some at the Office of Thrift Supervision, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp were annoyed that word of the deal reached them so late.

There were also concerns that Wall Street firms that had nurtured the housing finance sector during the recent boom would not be held to the same standards.

When hours of cajoling and huddle sessions failed to force a breakthrough, all the participants went their separate ways.

In a prepared statement, Cuomo’s office would not comment on the negotiations but said a lawsuit against the two firms was still possible.

Sources familiar with the talks said Cuomo has given Fannie Mae and Freddie Mac until early next week to reach a settlement, even if that means doing so over the head of

OFHEO.

Spokespersons from OFHEO, Fannie Mae and Freddie Mac declined to speak about the details of Monday’s negotiations.

Reporting by Patrick Rucker; Editing by Neil Stempleman

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