May 27, 2008 / 8:05 PM / 11 years ago

UPDATE 1-US big bank regulator wants appraisal deal withdrawn

(Adds OFHEO comment, paragraphs 7-8)

By John Poirier

WASHINGTON, May 27 (Reuters) - A top U.S. banking regulator on Tuesday called for dismantling a recent agreement to create new standards and an oversight body for mortgage appraisers, citing unintended consequences and conflicts with federal laws.

In March, mortgage finance giants Fannie Mae FNM.N and Freddie Mac FRE.N struck a deal with their regulator and New York Attorney General Andrew Cuomo to create a watchdog aimed at preventing inflated home values.

John Dugan, head of the Office of the Comptroller of the Currency (OCC), said in a letter dated May 27 to Fannie and Freddie’s regulator that real estate appraisals should be conducted free from influence and coercion by lenders, brokers and other mortgage players.

Tough standards for appraisals should be rigorously enforced by federal and state regulators of mortgage lenders, brokers and appraisers, said Dugan, whose agency regulates some of the largest U.S. banks such as Bank of America Corp (BAC.N).

“The OCC has substantial concerns about the unintended adverse consequences ... for the safe, sound and efficient operation of national banks’ residential mortgage lending activities, as well as for the cost of mortgage credit to consumers,” Dugan wrote to the Office of Federal Housing Enterprise Oversight (OFHEO).

Dugan said forcing lenders to use outside appraisers could undermine the quality and reliability of valuations and could raise costs to consumers.

OFHEO said the agency and the mortgage finance companies are reviewing Dugan’s concerns, adding that the agreement will also affect non-federally regulated entities, including some previously involved in appraiser abuse.

“OFHEO will be overseeing this process and will continue to communicate with the banking regulators to ensure that their comments receive the highest attention,” an OFHEO spokesperson said in a statement.

Outcry from the OCC adds heft to criticism from industry groups such as the Appraisal Institute, and underscores comments Dugan made to reporters in mid-April. The Mortgage Bankers Association last month urged the chief executives of Fannie Mae and Freddie Mac to withdraw the agreement.

As part of the agreement, Fannie and Freddie will uphold a new code of conduct meant to keep mortgage lenders at arm’s length from home appraisers and will also spend $24 million to jump-start the new oversight body. The deal helped prevent lawsuits from Cuomo.

In 2007, Cuomo launched an investigation to determine if home appraisers were inflating the value of homes, which contributed to the U.S. housing bubble and subsequent crash.

Starting next year, the government-sponsored enterprises will buy home loans only from lenders that endorse an appraiser code of conduct that Cuomo said he hopes will become an industry standard.

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. OFHEO will host the new watchdog group, which will maintain a consumer hotline and promote appraiser independence.

“We see no legal basis for OFHEO to share or delegate rule-making authority to the NYAG,” Dugan said, adding that national bank laws prohibit the agreement from applying to OCC-regulated banks and their subsidiaries.

Senator Charles Schumer, a New York Democrat, expressed his support for Cuomo. “This agreement cracks down on abuses that federal regulators, to this day, have not seen fit to address,” Schumer said in response to Dugan’s opposition. (Additional reporting by Al Yoon in New York) (Reporting by John Poirier)

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