America's two largest mortgage controllers, Freddie Mac (FMLC) and Fannie Mae (FNMA) recently agreed to enact tougher standards on appraisers and lenders beginning in January 2009. FMLC and FNMA buy mortgages from all facets of the mortgage industry and together they control over 80 percent of the mortgage industry. They either hold these mortgages in their own portfolios or package them into mortgage-backed securities for resale to investors. Any variation from current policies within these two agencies would create a ripple effect that will be felt by all mortgage institutions and appraisers large and small.

November of last year Mr. Cuomo, the New York State Attorney General and long time champion of equal housing, began investigating FMLC and FNMA as part of his industry-wide investigation of mortgage fraud. In this investigation Mr. Cuomo specifically targeted Washington Mutual (WaMu), the nation's largest savings and loan, and threatened to widen his investigation to other large lenders like Countrywide and Wells Fargo. His point of contention is the appraisal process and how it affects the housing market adding that he believes that "the appraisal process is broken."

It is very likely that Mr. Cuomo's investigation would have turned up problems and inconsistencies within these two mortgage giants, as is the case with most large companies. Many people in the mortgage industry argue that any large company such as Wal-Mart, Starbucks and Microsoft are almost certain to have problems on close inspection but on the whole run a tight ship. The problem is that in today's over sensitive mortgage market any negative news that concerns FMLC and FNMA will be given national attention in effect making mountains out of mole hills.

Mr. Cuomo doesn't have the power to make policy changes for FMLC and FNMA; however, he does have the ability to garner national attention from the media by calling the two giants into question. Amid scrutiny, FMLC and FNMA have agreed to abide by Mr. Cuomo's "suggestions" and only buy loans only from banks that agree to his standards of appraiser independence. In exchange, Mr. Cuomo has agreed to forego his investigation. These standards are set to go into effect January of 2009, and among other things, will bar lenders from using in-house staff or a company it controls to conduct appraisals.

As is the case with most regulations and legislation, Republicans feel that the rule is over -reaches and Democrats feel it doesn't reach far enough for. The problem is that Republicans and Democrats have been left out of the loop on a policy that has huge ramifications for the mortgage industry. If this were to be legislated there would the normal give and take and eventually come up with a compromised version of the policy that is arguably better.

This policy change was reached as an agreement between the OFHEO (Office of the Federal Housing Enterprise Oversight) and Mr. Cuomo. According to OFHEO mission statement "has regulatory authority similar to such other federal financial regulators as the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency..." Basically they were designed as a fail-safe for Fannie Mae and Freddie Mac when they became publicly-owned corporations whose shares are listed on the New York Stock Exchange.

According to John Dugan, the Comptroller of the Currency, Congress should make the call on this policy change, not OFHEO and a state attorney general behind closed doors. In a lengthy letter to the OFHEO Mr. Dugan wrote, "Provisions of the National Bank Act would prevent this de facto regulation from being applied to, or enforced against, national banks." If oversight of the appraisal process is to be revamped, he argues that Congress should be making that call on issues that affect so many homeowners not a regulatory committee designed to protect the fiscal security of FMLC and FNMA.

Mr. Dugan contends that this provision will "undermine the quality of appraisals and raise the cost of appraisals to both the consumer and the lenders." Sentiment among Republicans such as Elizabeth Dole agree with Mr. Dugan's position and are using his recent letter as ammunition to take up the charge. However, she will be struggling with a seasoned adversary from the Democratic Party, Charles Schumer, who has sided with Mr. Cuomo.

Either way, homeowners, mortgage companies and appraisers need to brace for the wave of regulations to come. Many in Congress who have tried for years to regulate the banking industry have all the ammunition they need to do it now. Don't expect much too much to happen in election year due to deadlocks on both sides of the aisle. However after the election, you can expect change in the banking industry, and according to which side wins will be the degree of regulation.