Subprime Legal, Take 2: Is Cuomo’s Appraisal Fix Destined for Court?

[WSJ_law_blog]

Will Andrew Cuomo’s “appraisal code of conduct” — the set of guidelines for mortgage lenders to follow to avoid inflated home appraisals — ever see the light of day? If it does, reports the WSJ’s James Hagerty today, it may well see a whole lot of litigation first.

Here’s the backstory: Earlier this year, Cuomo campaigned hard against inflated home appraisals. He threatened to sue government-sponsored mortgage investors Fannie Mae and Freddie Mac for allegedly failing to ensure that appraisers were shielded from pressure to pad their estimates.

In March, Fannie and Freddie, eager to avoid a legal battle, agreed with Cuomo on a so-called “appraisal code of conduct,” which is due to take effect next Jan. 1. The agreement was backed by Fannie and Freddie’s regulator, the Office of Federal Housing Enterprise Oversight (Ofheo).

But not everyone’s happy with the plan. Among other things, critics, including some federal regulators and mortgage-industry groups, say the code could raise costs for consumers and cause unnecessary disruption in the appraisal business.

According to today’s story, unless Cuomo works with the industry to revise the code, “somebody out there is likely to file litigation,” says Steve O’Connor, a senior vice president at the Mortgage Bankers Association. Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, says legal action against the planned code is “one option” his trade group will consider.

And what would that litigation look like? Some argue that the code of conduct is tantamount to federal regulation and so is subject to the Administrative Procedures Act. The act requires federal agencies seeking to make new rules to first publish a proposal and solicit public comments on it.

But in an interview, Mr. Cuomo said he was “totally confident in the legal process used.” Both he and Ofheo’s director, James Lockhart, promised to consider suggestions for changes in the code.