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Firms conspired to inflate housing market { November 2 2007 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/content/article/2007/11/01/AR2007110101231.html?hpid=moreheadlineshttp://www.washingtonpost.com/wp-dyn/content/article/2007/11/01/AR2007110101231.html?hpid=moreheadlines
New York Sues Appraiser In Mortgage Loan Probe
By Carrie Johnson
Washington Post Staff Writer
Friday, November 2, 2007; D01
New York's attorney general sued one of the country's largest mortgage appraisers yesterday for inflating house values, saying it would be the first in a series of cases to attack what he said were pervasive conflicts of interest that contributed to the housing crisis.
Andrew M. Cuomo filed civil charges against a subsidiary of First American Corp. for buckling under pressure from mortgage lender Washington Mutual, its top client, at the expense of as many as 262,000 consumers who may have purchased houses at artificially high prices since last year.
WaMu, as it is known, was not included in the lawsuit because of questions about state authority over federally chartered lending institutions.
Cuomo's investigation is likely to have national impact because of the prominence of his targets and his bully pulpit in the country's financial capital. Cuomo's conflict-of-interest settlement with Sallie Mae earlier this year was seen as a watershed in the investigation of the student loan industry. Action against First American, which provides title insurance, closing services, credit reports and home warranties in many states, comes after a nine-month investigation of fraudulent practices that injure both home buyers and investors. The Department of Housing and Urban Development, the Securities and Exchange Commission and state authorities in Ohio have also announced probes into overblown appraisals, lax reviews by credit agencies that rate mortgage debt and stock sales by executives at real estate companies as problems worsened this year.
"This is certainly not isolated to New York, and it's certainly not limited to this particular case," said Terry Dunkin, president of the Appraisal Institute, a professional organization that is working with Rep. Paul E. Kanjorski (D-Pa.) on legislation that would increase penalties for appraisers who fail to maintain their independence and lenders who lean on them. "It's an issue that competent, scrupulous appraisers have been dealing with for several years now."
Appraisals are the bedrock of the housing industry, with lenders, brokers, real estate agents and home buyers all relying on their accuracy. With the credit and housing crunch likely to result in more than 2 million foreclosures, experts say that exaggerated home prices have contributed to the crisis.
Eric Corngold, an economic justice deputy in the New York attorney general's office, said hundreds of subpoenas and interviews had uncovered "fundamental flaws" with appraisals. Corngold said he is in the course of a continuing, as yet unpublicized probe into the packaging of mortgage loans.
In a statement, First American said the lawsuit has "no foundation in fact or law." The company said Cuomo's allegations are "largely based on a handful of e-mails that have been taken out of context, or mischaracterized, and an incomplete review of the facts."
At the center of the case is First American subsidiary eAppraiseIT, which compromised its integrity in exchange for more than $50 million in revenue from WaMu since April 2006, the lawsuit alleges. The appraisal company, based in Poway, Calif., broke antifraud laws and ran afoul of independence rules, according to New York officials.
WaMu, the nation's second-largest mortgage lender, issued a statement yesterday saying it was "surprised and disappointed." The company said it would suspend its relationship with eAppraiseIT and insisted, in response to Cuomo's accusations, that it had "absolutely no incentive to have appraisers inflate home values."
However, the complaint, which was filed in New York state court, said WaMu, based in Seattle, had a motive to lean on appraisers because it earns fees when a housing transaction closes.
Taking a page from the playbook of Eliot L. Spitzer, his predecessor as attorney general and now New York's Democratic governor, Cuomo peppered his lawsuit with e-mails written by leaders of eAppraiseIT and First American to illustrate a steady erosion of corporate standards.
The president of WaMu mortgage told First American executives that the mortgage lender would consider "expanding our relationship" into other lines of business if "the appraisal issues are resolved and if things are working well," according to a September 2006 e-mail.
Under pressure from WaMu, eAppraiseIT agreed to use evaluators that WaMu handpicked and designated as "proven appraisers." Employees who took part in the program were selected for their willingness to cooperate with WaMu in inflating prices, the lawsuit alleged. A third of the company's staff appraisers once worked at WaMu, and all of eAppraiseIT's business review managers came from WaMu, according to the suit.
In one instance, a "proven appraiser" valued a property at $750,000 higher than another reviewer in the office, according to internal eAppraiseIT correspondence.
Failure by some appraisers to go with the program caused WaMu to shift its Northern California listings late last year to another company, Lenders Service, court papers said. Three unnamed eAppraiseIT reviewers were blacklisted for refusing to cave under pressure and inflate home values.
"We have agreed to roll over and just do it," an eAppraiseIT president told senior executives at his parent company Feb. 22, according to court filings.
Eventually, the arrangements drew heightened scrutiny within eAppraiseIT, with officials calling the deal "way over the line" and "quite a stretch." In April, a high-level executive concluded that the inflated appraisals violated an alphabet soup of rules established by bank regulators from the Office of Thrift Supervision and the Comptroller of the Currency, according to e-mail mentioned in the lawsuit.
The same month, an executive vice president worried that the deals "will tarnish our reputation in the appraisal community because we are allowing WaMu to pick appraisers . . . It makes us look complicit."
Staff researcher Richard Drezen contributed to this report.
© 2007 The Washington Post Company
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