Tuesday, March 4, 2008; Page D01
Fannie Mae and Freddie Mac's revenues are related to the volume of loans they buy and guarantee. More loans and bigger loans can generate greater revenue from guarantee fees and mortgage interest. But if their loans are based on inflated real estate values, Fannie Mae, Freddie Mac and the investors who buy their securities have less collateral than it appears, magnifying losses in the event of foreclosure.
Fannie Mae and Freddie Mac were always able to set appraisal requirements for the loans they buy or guarantee, said financial services analyst Josh Rosner of Graham Fisher & Co. "So if this is really needed, it suggests that their models have failed. If this is not really needed, then it's nothing more than public relations."
A survey last year by October Research, a publisher of real estate industry newsletters, found that 90 percent of appraisers said they had been pressured to change appraisals.
Appraiser Peter M. Scalise of Bruce W. Reyle & Co. in Fairfax said that he had not encountered pressure but that he can remember "some instances of begging." Scalise said he could not tell from the new code of conduct what criteria lenders would use when choosing appraisers.
The conflicts of interest in the appraisal business have been much like those that have affected other financial gatekeepers, such as Wall Street analysts who rated stocks that their investment banks underwrote and outside auditors responsible for acting as watchdogs over the companies that hire them.
The government tried to assure the independence of appraisers through legislation adopted in response to the savings and loan crisis of a generation ago, but the provision wasn't enough or wasn't enforced well enough, said John Taylor, president of the National Community Reinvestment Coalition.
Monday's agreement is subject to a period of public comment and would not take effect until Jan. 1, 2009.
Staff writer Carrie Johnson contributed to this report.
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