New York probes government lenders

New York Attorney General Andrew Cuomo's subpoenas to government-sponsored lenders Fannie Mae and Freddie Mac sent another shock into the home mortgage industry where he said conflicts of interests are costing consumers thousands of dollars because of inflated appraisals.

On Wednesday Cuomo said he wants to know about loans Fannie Mae and Freddie Mac purchased from banks, including Washington Mutual Inc. The subpoenas also seek to find out how the government-sponsored companies handle appraisals to see if lower income home buyers were stuck with loans based on inflated appraised values.

The Democrat has accused a major appraiser of colluding with lenders to inflate home values and indebtedness for home buyers. On Wednesday, he was able to get the government-sponsored lenders to accept an independent examiner to review their loans. The examiner, to be approved by Cuomo, will review all loans involving mortgage giant Washington Mutual Inc. and the two government-sponsored lenders.

"In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals," Cuomo said.

"Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender's interest," Cuomo said. "Knowing this, Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals."

The markets reacted quickly.

Washington Mutual Inc. fell $4.19, or 17.3 percent, to $20.04. And shares of Fannie Mae fell $5.99, or 10.8 percent, to $53.64, after briefly hitting a 52-week low. In addition, Freddie Mac shares declined $4.18, or 8.5 percent, to $45.21. Freddie Mac shares also hit a 52-week low Wednesday, falling all the way to $44.76.

"If true, the appraisal practices described in the complaint would violate Fannie Mae's requirements for loans we purchase from lenders or securitize," said Brian Faith of Fannie Mae.

"It is against our interest to purchase or guarantee mortgages with inflated appraisals, and so it is in Fannie Mae's interest that these appraisal practices be investigated," he said. "If the examiner determines we own or guarantee mortgages with inflated appraisals, our guide states that the lender must buy back the loans that do not meet our standards and requirements.

"We are pleased to cooperate with the New York attorney general's investigation and have agreed to appoint an independent examiner as requested," said Doug Duvall, spokesman for Freddie Mac. "We depend upon accurate appraisals. In fact, accurate appraisals are fundamental to our effective credit-risk management as well as to the long-term success of home buyers."

Fannie Mae and Freddie Mac were created by Congress to make home ownership affordable for low- and middle-income people.

Fannie Mae and Freddie Mac companies pump money into the nearly $11 trillion home-loan market by buying blocks of mortgages from lenders and then packaging them into securities for sale to investors.

James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, said he will discuss the issue with Cuomo.

On Tuesday, the federal government reached a $16.4 million settlement with Freddie Mac's former CEO for his role in the company's multibillion-dollar accounting scandal.

In 2004, massive accounting problems were found at its government-sponsored sibling, Fannie Mae, and that company's chief executive, Franklin Raines, also was forced out.

Cuomo's announcement comes less than a week after the attorney general filed suit against a major real estate appraisal company, accusing it of colluding with the nation's largest savings and loan companies to inflate the values of homes, thus contributing to the subprime mortgage crisis.

Cuomo last Thursday announced a lawsuit against eAppraiseIT that accuses the First American Corp. subsidiary of caving in to pressure from Washington Mutual to use a list of "proven appraisers" who he claims inflated home appraisals.

Washington Mutual, which was not targeted in the suit, cut ties with eAppraiseIT the following day.

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AP Writer Marcy Gordon contributed to this report from Washington.