Fannie Mae and Freddie Mac announced that they will no longer be honoring appraisals from lenders’ in-house appraisers or appraisal management companies that are owned or controled by the lender. Fannie and Freddie have agreed to new standards designed to ensure independence of the appraisal process. They have also agreed to provide $24M over a five-year period for independent monitoring of the new standards.

Fannie and Freddie’s federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), signed off on the agreements. OFHEO Director James Lockhart said he would be “closely monitoring” the rollout of the new standards over the next nine months to make sure they do not have “unintended consequences.” (Click here for OFHEO press release)

The standards established under a “Home Valuation Code of Conduct” will prohibit mortgage brokers and real estate agents from selecting appraisers. When underwriting loans, lenders who want to do business with Fannie and Freddie will be barred from using appraisal reports prepared by in-house appraisers, and most affiliated companies or real estate settlement services providers as defined under the Real Estate Settlement Procedures Act (RESPA).

There are some exceptions to the rule. Lenders may use reports obtained through affiliated appraisal management companies, but only if their ownership interest in the company is 20 percent or less, and the company is operated independently and the lender has no involvement in its day-to-day business operations including selection of appraisers.

And not all broker in-house appraisers will be out of a job. Lenders will still be permitted to use in-house appraisers to order appraisals, conduct reviews or other pre- or post-funding quality control, develop internal automated valuation models, and prepare appraisals in connection with loan workouts.

Lenders will have until January 1, 2009 to include assurances in their representations and warranties that mortgages originated after that date conform to the new standards.

(Cross post from real/diaBlog)