eAppraiselT, WAMU Blow Up, Fannie, Freddie

Editor’s Note: Coast to coast appraisers are thinking: “I told you so.” Many predicted that unchecked lender pressure and other shenanigans during the refi-boom, sooner or later, would have its consequences. Some said it would be another Savings and Loan-type crisis, with taxpayers footing the bill- again. What we are in the midst of may end up being much worse. Lenders are under close scrutiny and money is tight: the stock market is staggering and there’s talk of an evitable recession in the wake of the sub-prime mess and housing collapse. Many appraisers rang the alarm bells years ago but few outside the industry stirred. Appraisers may have some satisfaction at being proved right but few feeling like enjoying “the last laugh”; most are suffering through this tough market just like everyone else.

“I Told you So?” eAppraiseIT, WAMU Blow Up, Fannie, Freddie

By Cary Barker, Asst. Editor, WRE

First American Corporation and its subsidiary eAppraiseIT, the company that attempted to shut down Pamela Crowley’s MortgageFraudWatchList web site (read story), are now being sued by New York Attorney General, Andrew M. Cuomo, for allegedly caving into demands for higher appraisal values from their largest client, Washington Mutual, Inc. (WaMu), which violates state and federal regulations that call for independent home appraisals.

Cuomo was the keynote speaker at a la mode’s national conference in January 2006, where he got an earful from appraisers about lender pressure and the importance of appraiser independence. It seems he was listening.

This rapidly unfolding story began November 1, 2007 when Cuomo filed a lawsuit against First American and eAppraiseIT. According to the complaint, WaMu became unhappy with eAppraiseIT appraisers when they supplied appraisal values that were too low for WaMu to close loans. WaMu’s loan production staff was then allegedly allowed to personally select appraisers who they believed would provide the values WaMu wanted. The complaint also accuses eAppraiseIT of allowing WaMu to pressure appraisers to change values if they were too low.  (Read the complaint, New York vs. First American.)

“The independence of the appraiser is essential to maintaining the integrity of the mortgage industry,” Cuomo said at a press conference held November 1. “First American and eAppraiseIT violated that independence when Washington Mutual strong-armed them into a system designed to rip off homeowners and investors alike.”

First American denied the allegations. “We vehemently disagree with his characterization of the facts,” said Kenneth DeGiorgio, First American’s General Counsel, in a conference call with analysts. “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.”

Washington Mutual has not been sued because it is regulated by federal rather than state agencies, according to Bloomberg.com (http://www.bloomberg.com/apps/news?pid=20601087&sid=ajFo10xQYMd0&refer=home).

“I think this is a good indication of what the appraisers run into,” said Vicky Cassens Zillioux, Senior Partner at Mortgage Lending Consultancy. “If the big guys can get pushed around, imagine the appraiser’s experience.  Also, it points out that appraiser management companies (such as eAppraiseIT) are not necessarily the solution to the appraiser pressure issue.”

Emails Can’t be Shredded
The lawsuit is based on e-mails collected by Cuomo that were written between executives at eAppraiseIT, First American and Washington Mutual. The emails show that initially the executives at eAppraiseIT had concerns regarding the compromised independence. They wrote their concerns to the senior executives at First American, but the suit claims that ultimately, First American succumbed to WaMu’s demands in order to secure future business. Washington Mutual has now suspended its relationship with eAppraiseIT pending further investigation.

Here is one email from eAppraiseIT President to senior executives at First American, released by Cuomo’s office: “In short, we will now assign all WaMu’s work to WaMu’s ‘Proven Appraisers’ (bypassing our Staff and Elites, including the ones we hired from WaMu)…Performance ratings to retain position as a WaMu Proven Appraiser will be based on how many come in on value…We have agreed to roll over and just do it.”

Read the NY vs. First American Email Excerpts introduced as evidence.

In Spring 2006, WaMu closed its internal appraisal office, firing all staff appraisers. They quickly became eAppraiseIT’s largest client. EAppraiseIT has conducted more than 260,000 appraisals for WaMu and has received over $50 million, according to the lawsuit.

According to the indictment, the contract stipulated that if WaMu disagreed with a given value, it could challenge the appraisal by requesting a “reconsideration of value” (ROV). The indictment claims that this allowed WaMu to pressure eAppraiseIT appraisers to hit the values they wanted.

WaMu generally had a good reputation among appraisers for not exerting pressure. Many appraisers are surprised that WaMu is the first lender on the hook.

Earth Shakes
Cuomo has expanded into an industry-wide investigation between real estate appraisers and lenders. On November 7, 2007 Cuomo subpoenaed 800-pound gorillas Fannie Mae and Freddie Mac, seeking information on whether home loans purchased by the two biggest investors in U.S. mortgages from WaMu were based on corrupted appraisals.

“In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual’s mortgages have not been corrupted by inflated appraisals,” said Cuomo. “Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender’s interest. Knowing this, Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals.” (http://www.northcountrygazette.org/news/2007/11/07/mortgage_subpoenas/)

Cuomo may have overstepped in going after Fannie and Freddie, however, according to a letter from the Office of Federal Housing Enterprise Oversight. Read the OFHEO Letterto Cuomo.

Investment banks were also subpoenaed but Cuomo has declined to name them at this time.

Cuomo indicates his office discovered a “pattern of collusion” between lenders and appraisers which has led him to investigate other banks, including Washington Mutual, for potentially pressuring appraisers.

“I don’t believe it’s just about Washington Mutual,” Cuomo said at a press conference November 7. “I believe it’s widespread. I believe it’s the rule not the exception. And we’re investigating Fannie Mae and Freddie Mac and other investment banks as to the underlying practices that have allowed this to go on for so long.”

Link to Los Angeles Times article: http://www.latimes.com/business/la-fi-appraise2nov02,0,64399.story?coll=la-home-business.

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