Both the SEC and New York State Attorney General Andrew Cuomo are investigating possible appraisal problems at Washington Mutual (NYSE: WM), according to today's Wall Street Journal. The SEC is just starting its inquiry into whether investors of mortgage-backed securities were informed about how the mortgage lender arranged for home appraisals. WaMu said it's fully cooperating with the SEC and the Office of Thrift Supervision, which is WaMu's federal regulator.
Cuomo filed a lawsuit in November without naming the bank as a defendant, but alleged it "exerted pressure on an appraisal company to inflate property valuations to ensure its loans went through," according to the Journal story. Cuomo believes that WaMu hand-picked appraisers that brought in high valuations and that bank employees and pressured at least one appraisal company to increase estimates that came in too low. First American, which is named in the suit, asked that the case be thrown out of court because Cuomo doesn't have jurisdiction. It believes only the Office of Thrift Supervision can take action.
WaMu told the Journal, "After spending a month and a half investigating these allegations, we can say with confidence that there has been no systematic effort by WaMu to inflate home appraisals. We take these allegations seriously."
While there may not have been a systematic effort, clearly this kind of pressure did go on around the country as mortgage lenders battled for more and more of the mortgage lending pie. As I indicated in an earlier post, mortgage fraud is driving the number of foreclosures up. Inflated appraisals, whether ordered as part of a systematic process by the bank or "winked at" in an effort to bring in more business still feed the same problem.
I don't know whether this problem was rampant at WaMu, but all indications are that inflated appraisals helped to fuel the real estate bubble nationwide. These inflated appraisals gave investors a false sense of security that they were funding legitimate loans. if any bank or savings and loan is shown to be part of this pressure to drive appraisals higher they should be held just as liable as the others facing criminal charges.
Lita Epstein has written more than 20 books including the "Complete idiot's Guide to the Federal Reserve."
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Reader Comments (Page 1 of 1)
12-22-2007 @ 10:42AM
Dennis H said...
As a retired Retail Loan Consultant of WAMU and a current employee of a rival lending institution, I am shocked at the acquisitions of AG Cuomo. I was a loan consultant during the time that WAMU was transitioning from an internal appraisal department to outside appraisal sourcing. Two outside appraisal companies were chosen. Both companies were given instructions to keep appraisal costs down. To do this, these companies hired new or inexperienced appraisers who were not familiar with the complexities of the homes and areas that they were assigned. True values were missed. After many meetings, it was decided that appraisal fees would be commensurate with the difficulty and/or complexity of the appraisal. Senior Appraisers were now able to be selected. Never was there a conspiracy to arrive at a pre determined value in order to make the loan. In fact, appraisers had no idea on a refinance as to what the value needed was. The appraisal department ran independantly of sales production. WAMU may have made some bad loans but none were caused by appraisal fraud by Retail Loan Consultants.
12-21-2007 @ 6:26PM
MV said...
If you were attempting to inflate appraisals, you would not go to an independent source. When people lose money in any market, real estate or stock, someone else has to be the scapegoat, in this case the mortgage lender, Wa Mu. My experience with mortgage lenders is that they always tried to keep appraisals low.
12-22-2007 @ 7:38AM
Pat Kenmir said...
I sold my home in California in November of 2006 and it originally appraised at $ 710,000.00, but my sales price was $ 795,000. My reale state broker, knowing she needed a higher appraisal to sell my home found another lender and suggested to the lender that she knew of another prefered appraiser who could bring in a high figure to complete the deal. I finally sold my home for $ 790,000.00. I found out that if your selling your home, the appraiser can go another 10 to 15% higher, if it is suggested, to "make the deal happen". Her commission was 6%. She she would make the sale happen for that large of a commission.
12-23-2007 @ 4:34PM
BradParks said...
MV is right, everyone is looking for a scapegoat. The first question every appraiser asks before beginning the job is; what $ do I have to hit.
As for WaMu; appraisals are ordered up front in the loan process, LONG before the loan type is agreed upon. The loan could be portfoliod or sold, to inflate values you would only be screwing yourself knowing it may end up your own portfolio.
12-26-2007 @ 4:57AM
rs said...
EVERY MORTGAGE I HAVE SEEN OR BEEN INVOLVED WITH HAS ALWAYS BEEN APPRAISED LOWER THAN ACTUAL SALES PRICE, USUALLY BY 5-15% OF THE SELLING PRICE. THIS PRACTICE ALWAYS PROTECTS THE LENDER IN THE
EVENT OF A DEFAULT (FORECLOSURE) BY REQUIRING THE BORROWER TO INCREASE THE CASH DOWN PAYMENT AND REDUCING THE LENDER'S EXPOSURE IN THE EVENT OF A FORECLOSURE TO ALLOW FOR THE PROPERTY TO THEN SELL FOR THE MARKET VALUE TO MORE OR LESS MAKE SURE THE LENDER RECEIVES ITS MONEY BACK ON A DEAL THAT HAS GONE SOUTH.
1-10-2008 @ 4:56PM
G.B. said...
RS and Brad Parks do not have the first idea of what they are talking about. As an Appraiser of 16 years, several spent working with WAMU before dumping them as a client. The "practice that always protects the lender" of coming in 5 to 10% lower? What?! If you direct a value in any direction, higher or lower, in an effort to either get your loan closed or to protect your ass, you're in direct violation of State and Federal law RS. So you're saying that you intentially, did business with Appraiser's who "always" appraised the property 5-10% lower than a property that was placed on the open market by a real estate professional (Realtor), recieved a legitmate arms-length offer to purchase by an informed buyer, and then you intentially did business with an Appraiser who intentially appraised property 5 to 10% lower than that negotiated price to get the borrower to come up with more money, in turn covering the lender's ass?? That's illegal RS. 100% ILLEGAL.
1-02-2008 @ 11:42AM
JOHN T said...
REGARDING THE LOANS THAT THE HOMEOWNERS GOT. IT IS NOT THE FAULT OF THE BANKS LIKE WASHINGTON MUTUAL THAT THEY COULD NOT AFFORD TO PAY FOR THE MONTHLY PAYMENT.
THE BANKS DID NOT INFLATE THE APPRAISED VALUE OF THE STOCK. IT IS A PART OF THE BUBBLE. LOOK AT THE STOCK MARKET IT GOES UP AND DOWN. ARE YOU GOING TO SUE THE ONE WHO SET THE PRICE OF THE STOCKS.
PEOPLE YOU SPEAK GOOD ENGLISH BUT YOU DON'T KNOW MATHEMATICS. WE DONT NEED TO EXPLAIN BUT MATHEMATHECALLY AND STATISTICALLY IT IS SELF EXPLANATORY.
1-02-2008 @ 11:29AM
JOHN T said...
REGARDING THE LOANS THAT THE HOMEOWNERS GOT. IT IS NOT THE FAULT OF
THE BANKS LIKE WASHINGTON MUTUAL THAT THEY COULD NOT AFFORD TO PAY
FOR THE MONTHLY PAYMENT.
THE BANKS DID NOT INFLATE THE APPRAISED VALUE OF THE HOMES. IT IS A
PART OF THE BUBBLE. LOOK AT THE STOCK MARKET IT GOES UP AND DOWN.
ARE YOU GOING TO SUE THE ONE WHO SET THE PRICE OF THE STOCKS EVERY SECOND OF THE DAY?
PEOPLE,,, YOU SPEAK GOOD ENGLISH BUT YOU DON'T KNOW MATHEMATICS. WE
DONT NEED TO EXPLAIN BUT MATHEMATHECALLY AND STATISTICALLY SPEAKING IT IS SELF
EXPLANATORY.