Cuomo Spotted Appraisal Fraud as Core Problem in 2007

WaMu faulted on home loans

Colluded to inflate property values, N.Y. attorney general says


New York’s attorney general has accused Washington Mutual Inc. of pressuring a real estate appraisal company to deliver inflated home values in order to justify making loans, a practice that some appraisers have complained of increasingly in recent years.

The suit filed Thursday in a New York court by Attorney General Andrew Cuomo doesn’t name Seattle-based WaMu as a defendant. Instead, it charges First American Corp. and its eAppraiseIT subsidiary of engaging in “deceptive, fraudulent and illegal business practices.”

But WaMu figures prominently in the complaint: EAppraiseIT “improperly allows WaMu’s loan production staff to hand-pick appraisers who bring in appraisal values high enough to permit WaMu’s loans to close, and improperly permits WaMu to pressure eAppraiseIT appraisers to change appraisal values that are too low to permit loans to close.”

Cuomo said the actions of First American and Washington Mutual are indicative of widespread problems in the home-lending and appraisal businesses, and have contributed to turmoil in the housing market.

“It’s about time,” said Richard Hagar, who owns American Home Appraisals on Mercer Island, teaches anti-fraud classes and helped write Washington’s mortgage laws. “I have been surprised that no investigations have been started earlier on something like this.”

Graham Albertini, a former WaMu appraiser who now works for Hagar and teaches appraisal classes, said the bank’s appraisal process has been increasingly problematic since 2002.

“Starting in 2002 they shifted the emphasis from quality to quantity,” he said.

Appraisers have been complaining with increasing vehemence in recent years about the kind of pressure Cuomo described, saying it has enabled buyers to overpay, leaving many with mortgages for more than their homes were worth.

The traditional role of appraisers was to provide some protection for lenders, who wanted to make sure they could recoup their money if they had to foreclose. But in recent years, appraisers have increasingly been getting their work from mortgage originators representing lenders and banks that almost immediately sell off mortgages to Wall Street investors.

Meanwhile, a hot home market caused buyers to bid prices to new heights. Now that prices have started to level off in the Seattle area and decline elsewhere, some buyers are finding they cannot sell their homes for what they owe, leaving them with few alternatives to foreclosure.

“A lot of this doesn’t get revealed until you have a downturn in the housing market,” said Scott Jarvis, director of the state Department of Financial Institutions.

Washington Mutual said in a statement it is “surprised and disappointed by the allegations. … We are suspending our relationship with eAppraiseIT until we can further investigate the situation. We have absolutely no incentive to have appraisers inflate home values. In fact, inflated appraisals are contrary to our interests. We use third-party appraisal companies to make sure that appraisals are objective and accurate.”

“We vehemently disagree with (Cuomo’s) characterization of the facts,” Kenneth DeGiorgio, First American’s general counsel, said in a call with analysts, according to Bloomberg News. “We’re confident that once we’ve had the opportunity to set forth our response before an impartial arbiter, our activities will be found to be appropriate.”

Hagar said Washington Mutual never pressured him on an appraisal.

“That changed about five-ish years ago,” he said. “We started getting some pressure and they started looking for lesser appraisers — not the best qualified, but anyone who could get it done fast and cheap.”

But Hagar also said appraiser pressure is an industrywide problem, and acknowledged that WaMu has a better reputation than many lenders.

Albertini said WaMu had great standards for appraisals until 2002, when the company started automating much of its appraisal review work.

WaMu took no action in cases where reviews of homes that ended up in foreclosure found the original appraisal had been bad, Albertini said. “They would still hire that appraiser and they would never do anything to get that appraiser in trouble.”

In 2005, the company created a separate group of appraisers to quickly look over appraisals without doing a full review, and paid incentives based on how many they OK’d, Albertini said.

One 2006 appraisal pegged a West Seattle house at $2.5 million above its true value by comparing it with homes in Medina, but WaMu went ahead with the refinance loan, Albertini said. “They would pretty much just disregard what I did and then loan on the original appraisal.”

Albertini said he never received any pressure from WaMu managers to do anything wrong.

The lawsuit cites numerous e-mails that Cuomo says indicate the pressure Washington Mutual put on appraisers to be compliant, flexible and bank-friendly by delivering an appraisal price that met or exceeded the sales price. In one e-mail, a First American executive says the company could receive additional business from WaMu if disputes over appraisals are resolved.

In another e-mail, eAppraiseIT’s president signaled the company’s acquiescence to WaMu’s insistence that business be steered to “proven appraisers”: “We have agreed to roll over and just do it.”

Those e-mails “were not the idle chatter of disgruntled, low-level employees,” said Eric Corngold, executive deputy attorney general for economic justice.

EAppraiseIt executives on several occasions expressed uneasiness over the arrangement with WaMu and even concern that it might be illegal, e-mails cited in the suit indicate.

While investigators have pursued high-profile fraud cases in recent years, day-to-day pressure to meet inflated values has not been a priority, Hagar said. Washington regulators acknowledged this earlier this year, saying they have small staffs, few appraisers file formal complaints and pressure cases were often hard to pursue.

Hagar has been looking for action from federal regulators, given the size of banks such as WaMu. “It’s very, very difficult for any single state agency to go out after them,” he said. “Bravo that the attorney general from New York has the resources to go after them.”

Albertini noted that few appraisers ever get in trouble for bad appraisals, and penalties tend to be small.

“I think all it would take for appraisers to wise up and change is hearing about a few of them getting in trouble,” Albertini said. “There’s been nobody going after the bad appraisers.”

Washington Mutual wasn’t named as a defendant, Cuomo said, because state attorneys general are pre-empted from filing legal actions against financial institutions such as WaMu that are federally chartered.

Cuomo said his office will notify federal regulators of his office’s findings, adding that “the federal government is asleep at the switch once again.” Cuomo, who served as secretary of Housing and Urban Development in the Clinton administration, said the issue of appraisal fraud isn’t new. “We learned these lessons over 20 years ago” in the wake of the savings and loan crisis.

A spokesman for the federal Office of Thrift Supervision, which regulates WaMu, said it had just become aware of the suit and wasn’t able to comment.

The news delivered another hit to WaMu’s stock, already reeling from the hit to its earnings from housing-market turmoil. WaMu stock closed at $25.75, down $2.13 per share. Since trading at more than $45 this year, Washington Mutual has slid to its lowest closing price since October 2000.


New York Attorney General Andrew Cuomo is using e-mails as the basis for much of his case against a major real estate appraiser he accuses of “caving” in to pressure from a lender to inflate property values. Cuomo says the internal e-mails are also evidence of collusion between eAppraiseIT, a subsidiary of First American Corp., and Washington Mutual Inc. Excerpts:

  • Sept. 27, 2006: First American’s vice chairman said a Washington Mutual executive told him that cooperating could lead to more business: “If the appraisal issues are resolved and things are working well he would welcome conversations about expanding our relationship.”
  • Feb. 22, 2007: eAppraiseIT’s president told senior executives at First American: “We have agreed to roll over and just do it …”
  • April 4, 2007: eAppraiseIT’s executive vice president warned First American: “We as an AMC (Appraisal Management Co.) need to retain our independence from the lender or it will look like collusion … eAppraiseIT is clearly being directed who to select. The reasoning … is bogus for many reasons including the most obvious — the proven appraisers bring in the values.”SOURCE: New York State Office of the Attorney General/The Associated Press
  • P-I reporter Bill Virgin can be reached at 206-448-8319 or

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