From the Office of the New York State Attorney General
Andrew M. Cuomo
Department of Law
Issues Notice of Martin Act Subpoenas to
Nation’s Two Largest Mortgage Financiers
Fannie Mae and Freddie Mac Agree to Demand for
Immediate Independent Examiner to Review
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:
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 Freddie Mac, selling $24.7 billion in loans in 2007 alone. Washington Mutual is also the fourteenth largest provider of loans to Fannie Mae, 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.
New York Probes Government Lenders
Wednesday November 7, 1:19 pm ET
By Michael Gormley, Associated Press Writer
NY State Probe of Mortgage Conflicts Hits Fannie Mae, Freddie Mac
ALBANY, N.Y. (AP) -- New York Attorney General Andrew Cuomo said Wednesday that he has issued subpoenas to government-sponsored lenders Fannie Mae and Freddie Mac in his investigation into what he claims are conflicts of interest in the mortgage industry.
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.
Cuomo said Fannie Mae and Freddie Mac have agreed to his demand that an independent examiner, subject to the attorney general's approval, review all Washington Mutual appraisals and mortgages done with 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."
Fannie Mae and Freddie Mac were created by Congress to make home ownership affordable for low- and middle-income people.
"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.
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.
"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 homebuyers."
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.
"OFHEO has supported cooperation by Fannie Mae and Freddie Mac with law enforcement at all levels," Lockhart said. "In particular, for the past three years, we have worked with the government-sponsored enterprises to enhance their programs to combat mortgage fraud and to provide outreach to their seller-services on best practices."
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.
In afternoon trading, Fannie Mae shares, which are down nearly 7 percent for the year amid the subprime crisis, were down $4.74, or 8.6 percent, to $50.65.
Freddie Mac shares were trading at $46.92, down $2.47 or 5 percent from its opening price. The stock has fallen more than 27 percent for the year.
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.
AP Writer Marcy Gordon contributed to this report from Washington.