New York Attorney General Goes After Fannie and Freddie

The Wall Street Journal reports:

NEW YORK ATTORNEY GENERAL CUOMO SENDS LETTERS OF NOTICE AND DEMAND TO FREDDIE MAC AND FANNIE MAE

Issues Notice of Martin Act Subpoenas to Nation's Two Largest Mortgage Financiers Expanding Industry-Wide Investigation

Fannie Mae and Freddie Mac Agree to Demand for Immediate Independent Examiner to Review All Washington Mutual Appraisals

NEW YORK, NY (November 7, 2007) – Attorney General Andrew M. Cuomo today announced his office has sent Letters of Notice and Demand, providing notice of the issuance of Martin Act subpoenas and a demand for an Independent Examiner, to the nation's two largest financiers of home mortgages, Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Cuomo also announced that Fannie Mae and Freddie Mac have agreed to the demand to retain an Independent Examiner, subject to the Attorney General's approval, to conduct a total review of all Washington Mutual (NYSE: WM) appraisals and mortgages purchased by the companies.

The Martin Act subpoenas sent by Cuomo seek information on the mortgage loans Fannie Mae and Freddie Mac purchased from banks, including Washington Mutual, the nation's largest savings and loan. The subpoenas also seek information on the due diligence practices of Fannie Mae and Freddie Mac, and their valuations of appraisals.

Today's announcement marks the latest expansion of Cuomo's industry-wide investigation of mortgage fraud. Last week, Cuomo filed suit against First American Corporation (NYSE: FAF), and its subsidiary eAppraiseIt, one of the nation's largest real estate appraisal management companies, for colluding with Washington Mutual to inflate the appraisal values of homes.

"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," said Attorney General Cuomo. "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. 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 subpoenas issued include requests for:
• Information about all of the mortgage loans Fannie Mae and Freddie Mac have purchased from any bank, including Washington Mutual, and the mortgage-backed securities associated with those loans;

• Information about due diligence practices of Fannie Mae, Freddie Mac;

• Information about appraisals and valuations by the originating lenders;

• Policies and procedures related to valuing properties and appraisals.


Fannie Mae (Federal National Mortgage Association and Freddie Mac (Federal Home Loan Mortgage Corporation) are two of the largest financiers of home mortgages in the country, and both purchase loans from Washington Mutual. Washington Mutual is the third largest provider of loans to Fannie Mae, selling $24.7 billion in loans in 2007 alone. Washington Mutual is also the fourteenth largest provider of loans to Freddie Mac, selling $7.8 billion in loans in 2007.

"The integrity of our mortgage system depends on independent appraisers," said Cuomo. "Washington Mutual compromised the fairness of this system by illegally pressuring appraisers to provide inflated values. Every company that buys loans from Washington Mutual must be sure that the loans they purchased are not corrupted by this systemic fraud."

The lawsuit filed last week details a scheme in numerous e-mails showing First American and eAppraiseIT caved to pressure from Washington Mutual to use appraisers who provided inflated appraisals on homes. E-mails also show that executives at First American and eAppraiseIT knew their behavior was illegal, but intentionally broke the law to secure future business with Washington Mutual. Between April 2006 and October 2007, eAppraiseIT provided over 250,000 appraisals for Washington Mutual.

"I wish I could say I am shocked by the discoveries made by the Attorney General and his staff. Sadly, what allegedly happened between First American and Washington Mutual is not an isolated incident. Rather, it is symbolic of a problem that has plagued the appraisal industry for years," said Terry Dunkin, President of the Appraisal Institute. "As the allegations against First American show, the mortgage industry's dirty secret has been that banks exert tremendous pressure to extort appraisers."

Cuomo's office has been conducting a nine month investigation into the mortgage industry, which has identified two key areas of concern: appraisals and securitization. On Monday, November 5, Attorney General Cuomo traveled to Washington, D.C. to endorse the Escrow, Appraisal, and Mortgage Servicing Improvements Act (H.R. 3837), sponsored by Representative Paul E. Kanjorski (D-PA). This bill will create new protections for consumers and investors and prohibit the improper coercion of appraisers to meet target appraisals.

This investigation is under the direction Executive Deputy Attorney General for Economic Justice Eric Corngold.