WaMu accused of pushing appraisers to inflate values

Already battered and bruised by the nationwide housing slump, Washington Mutual got another black eye Thursday when New York Attorney General Andrew Cuomo accused the company of pressuring appraisers to inflate home values.

In a lawsuit filed in New York state court, Cuomo and his team accused appraisal firm eAppraiseIT and its parent, First American, of knuckling under to Seattle-based WaMu, one of the nation's biggest mortgage lenders.

"Simply put, First American and eAppraiseIT signed over their independence to Washington Mutual, so that Washington Mutual's loan staff could illegally hand-pick the appraisers who would hit the numbers that Washington Mutual wanted," said Eric Corngold, New York's deputy attorney general for economic justice.

Along with complicated subprime mortgages being issued to homebuyers who couldn't afford them, faulty appraisals have emerged as a key factor in the nation's housing-market collapse.

Though the suit specifies work done only in New York state, a spokesman for Cuomo said investigators found the same practices across the country. All told, according to the suit, eAppraiseIT conducted more than 260,000 appraisals for WaMu between April 2006 and September 2007, earning more than $50 million in fees as a result.

Cuomo said he didn't directly sue WaMu because as a federally chartered institution it is the federal government's regulatory responsibility.

Bill Ruberry, a spokesman for the U.S. Office of Thrift Supervision, said the agency is "actively looking into these allegations," adding that he wished Cuomo's office had shared the information it had gathered in the course of its nine-month investigation before going public with it.

In a written statement, WaMu said it was "surprised and disappointed" by the allegations in the suit, and said it was suspending its relationship with eAppraiseIT until it could look into the situation further.

First American's general counsel told analysts in a conference call that the company "vehemently disagree[s] with [Cuomo's] characterization of the facts" and said the company would be vindicated in court.

"We have absolutely no incentive to have appraisers inflate home values," WaMu said in its statement. "In fact, inflated appraisals are contrary to our interests. We use third-party appraisal companies to make sure that appraisals are objective and accurate."

The suit claims, however, that WaMu had a strong incentive to push for higher appraisals, and that far from being independent of WaMu, its largest client, eAppraiseIT was stocked with former WaMu employees and under near-constant pressure from the Seattle thrift.

By overvaluing homes, the suit claims, WaMu was able to make more and bigger loans than the properties' true values would warrant. That, Cuomo said at a news conference, pumped up WaMu's bottom line and loan officers' commission payments, at the expense of homebuyers and investors.

If buyers with artificially inflated mortgages later run into trouble making their monthly payments, they may find they can't sell their house or refinance their loan for what they thought it was worth. Even if the home is foreclosed, Cuomo said, it might not sell for enough to repay the loan: "And now you have a mountain of personal debt for the rest of your life."

Like most other home lenders, WaMu sold off many of its loans to outside investors in the form of mortgage-backed securities. When buyers default on the mortgages that underlie those, the investors can be left holding worthless paper.

According to the suit, WaMu hired eAppraiseIT and another firm in the spring of 2006, after closing its own appraisal office. The idea, allegedly, was for eAppraiseIT to act as a buffer between the people issuing mortgage loans and the people deciding how much the property backing those loans was worth.

Within months, according to the suit, WaMu was pressuring the firm's appraisers to provide higher valuations — and increasingly shifting business to a competitor.

By February of this year, according to the suit, WaMu had told eAppraiseIT to assign its appraisals only to people on a "Proven Appraiser List" — allegedly chosen by WaMu's lending department because they provided high values.

Despite repeated misgivings and worries about legal implications, as expressed in several e-mails cited in the suit, eAppraiseIT and First American went along with WaMu's plan, the suit alleges. In a Feb. 22 e-mail, eAppraiseIT's president told senior First American executives that "we have agreed to roll over and just do it."

The New York suit seeks an injunction against First American and eAppraiseIT, and disgorgement of all profits obtained through the alleged scheme.

News of the suit helped send WaMu stock to its lowest closing price since September 2000. The shares lost $2.13, or 7.6 percent, to close at $25.75, on what was a down day for stocks in general and financial-services stocks in particular. For comparison, Keefe Bruyette & Wood's index of 24 leading U.S. banks lost 5.4 percent on the day.

The housing crunch already has forced WaMu to set aside $1.57 billion to cover bad loans, and the company expects to set aside another $1.1 billion to $1.3 billion by the end of the current quarter.

Through the first nine months of the year, WaMu's profit is down 27 percent versus the same period in 2006.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com