Regulator Irate Over NY AG's Probe of Fannie and Freddie

In what appears to be a potential "turf war," the director of Ofheo [Office of Federal Housing Enterprise Oversight], which regulates government-sponsored mortgage lenders Fannie Mae and Freddie Mac, said he was "disappointed" his office was not contacted "before or even after" the companies were subpoenaed by New York Attorney General Andrew M. Cuomo. On Wednesday, Cuomo said he uncovered a "pattern of collusion" between lenders and appraisers, and subpoenaed Fannie and Freddie seeking documents that may prove the lenders inflated appraisal values (full story). "These allegations of appraisal fraud are a serious matter to the enterprises and Ofheo and require vigilant attention by all relevant government agencies," Ofheo director James B. Lockhart wrote Thursday in a letter to Cuomo. "I feel that you and your staff may not fully understand the differences between the mortgage-backed securities [MBS] issued by the GSEs [gov't sponsored enterprises] and those issued by other entities. In particular, unlike the issuers of private label MBS, when Fannie Mae or Freddie Mac issues an MBS, they retain the credit risk on the underlying mortgages by guaranteeing repayment to MBS holders. Consequently, they have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals." Lockhart asks to meet Cuomo, in order to discuss, among other things: Cuomo's demand that the GSEs cease doing business with a major federally-chartered bank that has not been charged or subpoenaed [WaMu]; the scope and authority of the independent examiner announced yesterday by the GSEs at Cuomo's bidding; the potential expansion of the probe to other financial institutions. Fannie Mae shares dropped 10.1% Wednesday while shares of Freddie Mac were off 8.6%. Thursday, Fannie Mae shares are down another 2.1%, while Freddie Mac shares have dropped 4.5%.

Sources: Lockhart letter, Dow Jones
Commentary: Fannie, Freddie, WaMu Tumble on Expanded Probe • Contemplating Life Without Guarantors • The Easing Credit Crunch
Stocks to watch: FNM, FRE, WM

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