New York Attorney General Andrew Cuomo announced today that his office sued Santa Ana-based First American Corp. and its eAppraiseIt mortgage appraisal unit for falsely inflating house values.
According to the press release, Cuomo said First American allegedly conspired with Washington Mutual to use a list of “proven appraisers” to inflate mortgage appraisals in a bid to fund more loans.
Apparently Washington Mutual had complained that appraised values were coming in too low, effectively killing loans in the process, forcing the bank to handpick appraisers to bump values higher, even if they weren’t accurate.
Per the lawsuit, eAppraiseIt allowed Washington Mutual’s loan production staff to handpick “appraisers who would bring in appraisal values high enough to permit WaMu’s loans to close.”
“The independence of the appraiser is essential to maintaining the integrity of the mortgage industry,” Cuomo said. “First American and eAppraiseIt violated that independence when Washington Mutual strong-armed them into a system designed to rip off homeowners and investors alike.”
Cuomo said e-mails documented the fact that eAppraiseIt executives understood their actions were wrong, but continued to break the law to secure future business with the mortgage lender and banking giant.
“First American helped set the current mortgage crisis in motion,” he said.
First American executives initially defended their valuations, but subsequently gave in to Washington Mutual’s demands to use the “preferred appraisers”, the lawsuit says.
“We have agreed to roll over and just do it,” eAppraiseIt’s president wrote in an e-mail to senior executives at First American, the lawsuit states.
First American’s vice chairman said a Washington Mutual executive told him that, “If the appraisal issues are resolved and things are working well he would welcome conversations about expanding our relationship.”
Washington Mutual hired First American’s appraisal unit, eAppraiseIt, in spring 2006 in order to comply with federal rules designed to ensure appraisals are done accurately and by independent analysis.
After WaMu terminated its staff appraisers, eAppraiseIT hired roughly 50 former Washington Mutual employees as staff appraisers and appraisal business managers, the lawsuit noted.
Between April 2006 and October 2007, the company provided roughly 262,000 appraisals for Washington Mutual, according to Cuomo.
The lawsuit, which was filed in New York Supreme Court, does not name Washington Mutual as a defendant.
The news is another blow to First American Corp., who also announced a 48% drop in third-quarter profit today as a result of declining revenue in its core title insurance business.
Update: WaMu has suspended its relationship with eAppraiseIt until it investigates the matter further.
“We have absolutely no incentive to have appraisers inflate home values,” WaMu said in a statement.
“Inflated appraisals are contrary to our interests. We use third-party appraisal companies to make sure that appraisals are objective and accurate.” the company added.
WaMu may have to set aside $412 million to $2.1 billion in extra reserves for loan buybacks if the lawsuit succeeds, according to a Keefe Bruyette & Woods analyst