N.Y. to Subpoena Freddie Mac, Fannie Mae

New York Attorney General Andrew Cuomo will subpoena the government-backed mortgage lenders Fannie Mae and Freddie Mac. Cuomo is investigating whether artificially inflated appraisals helped create the current subprime mortgage crisis.

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STEVE INSKEEP, host:

All that news sent the markets plunging yesterday, and this did not help either: New York Attorney General Andrew Cuomo will subpoena the government-backed lenders Fannie Mae and Freddie Mac. It's part of his investigation into whether banks inflated the value of homes to fuel their real estate business.

NPR's Chris Arnold reports.

CHRIS ARNOLD: Probably the biggest underlying cause of the mortgage market crisis is a fundamental change in the industry. Banks used to hold on to loans so they didn't want to put you in a loan that couldn't pay, but now loans quickly get sold downstream to a series of other companies and investors so a lender can make a commission on a bad loan, sell it to somebody else, and it's not their problem.

Mr. ANDREW CUOMO (Attorney General, New York): In this case, follow the money - the old expression - is follow the mortgage.

Attorney General Cuomo is demanding documents from Fannie Mae and Freddie Mac, two of the largest entities that buy mortgages from banks and lenders and resell them.

Mr. CUOMO: So the subpoenas commence an investigation on Fannie and Freddie. We've also been investigating investment banks on the secondary market side; that goes on. Fannie and Freddie did agree to an independent examiner.

ARNOLD: That examiner is going to be scrutinizing loans coming from one lender in particular, Washington Mutual. Cuomo alleges that the company illegally pressured home appraisers to inflate the value of homes in order to get more loans approved and spur business.

Mr. CUOMO: Our belief is the appraisals in many cases were fraudulent, that there was wide-spread pressure on the appraisers to change the appraisals.

ARNOLD: That could have led people to overpay for houses or borrow too much against houses that weren't actually worth what the appraisers claimed. That can prevent homeowners from refinancing out of high-interest adjustable loans.

Last week, Cuomo sued the home appraisal arm of First American Corporation for engaging in an improper deal with Washington Mutual. First American said the suit has, quote, "no foundation in fact or law." Washington Mutual also denied wrongdoing and said it has no incentive to get bogus appraisals.

Chris Arnold, NPR News.

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