New York Sues First American For Conspiring With WaMu To Inflate Home Appraisals

New York Attorney General, Andrew Cuomo, announced today that he’s suing one of the nation’s largest real estate appraisal firms for conspiring with Washington Mutual to artificially inflate appraisals.

WaMu is accused of providing First American with a list of “Proven Appraisers” who had a track record of bringing in more expensive appraisals. According to law, real estate appraisals are supposed to be independent in order to avoid the obvious conflict of interest between lender and appraiser. Cuomo says internal emails prove the company knew that their actions were illegal, but caved to pressure from WaMu in order to secure future business from the lender.

“The independence of the appraiser is essential to maintaining the integrity of the mortgage industry. First American and eAppraiseIT violated that independence when Washington Mutual strong-armed them into a system designed to rip off homeowners and investors alike,” said Cuomo in a statement. “The blatant actions of First American and eAppraiseIT have contributed to the growing foreclosure crisis and turmoil in the housing market. By allowing Washington Mutual to hand-pick appraisers who inflated values, First American helped set the current mortgage crisis in motion.”

The emails the AG’s office quotes in the statement are damning. Here they are:

  • On February 22, 2007, in response to a description of the WaMu “Proven Appraiser” program as one in which “we will now assign all Wamu’s work to Wamu’s ‘Proven Appraisers’… [and] Performance ratings to retain position as a Wamu Proven Appraiser will be based on how many come in on value,” eAppraiseIT’s president told senior executives at First American: “we have agreed to roll over and just do it…”
  • On April 4, 2007, eAppraiseIT’s executive vice president stated in an e-mail to First American: “we as an AMC [Appraisal Management Company] need to retain our independence from the lender or it will look like collusion… eAppraiseIT is clearly being directed who to select. The reasoning… is bogus for many reasons including the most obvious – the proven appraisers bring in the values.”
  • On April 17, 2007, eAppraiseIT’s president wrote an e-mail to First American explaining why its conduct was illegal: “We view this as a violation of the OCC, OTS, FDIC and USPAP influencing regulation.”
  • E-mail evidence also shows that WaMu pressured EA to inflate appraisals as a condition for doing future business together:
  • On September 27, 2006, First American’s vice chairman reported that a WaMu executive told him: “if the appraisal issues are resolved and things are working well he would welcome conversations about expanding our relationship…”


NY ATTORNEY GENERAL SUES FIRST AMERICAN AND ITS SUBSIDIARY FOR CONSPIRING WITH WASHINGTON MUTUAL TO INFLATE REAL ESTATE APPRAISALS
[New York AG]

THE PEOPLE OF THE STATE OF NEW YORK by ANDREW M. CUOMO, Attorney General of the State of New York, VS FIRST AMERICAN CORPORATION and FIRST AMERICAN EAPPRAISEIT (PDF)
[New York AG]

(Photo:meghannmarco)

Comments

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  1. Bay State Darren says:

    Cuomo’s the man! I think he should head up the FTC, seeing wow often he doess this stuff. [We get to vote him in for that, right?]

  2. HeyThereKiller says:

    Cuomo sues everyone… he’s his very own texas court system

  3. j03m0mma says:

    Someone’s going to jail. Someone’s going to jail.

  4. joeblevins says:

    I have a good friend that is an appraiser in SC. They are given assignments by Mortage Brokers. They are told how much the home is ‘suppposed to be worth’. Then the appraiser tries to make the numbers fit around that valuation. It isn’t a hard science. The values can flucuate wildly depending on who appraises, just for the same property.

  5. Anonymously says:

    Lenders pressure appraisal companies all of the time to bring in the right number. Well, they used to, I’m not sure what’s going on now.

  6. Nytmare says:

    I thought it was the seller who gets the house appraised in order to set the asking price. Or are they tricking competing buyers into offering more than the asking price?

  7. mrspaz says:

    Being a real estate appraiser, I decided to finally register here to comment on this story.

    Here’s how this works: Lenders want loans to happen. If for some reason a person applying for a loan doesn’t qualify or some other circumstances prevent the loan from being closed, then the lender and the broker make no money. Simple deal. Closed loan = get paid.

    In the case of home loans, the deal is especially lucrative for both the broker and the lender. After the loan is closed the lender will “resell” the loan to another lender in what is known as the secondary mortgage market for a portion of the loan’s lifetime value. The biggest player here is FNMA or “Fannie Mae,” a name I am sure many of you are familiar with. The bank loves this because they are (for the most part) freed of the liability right away. Sure they don’t make the full $300k that the loan would pay over 30 years, but they get $80k *right now.* Banks love immediate payout and loathe the long term. The advantage to the mortgage broker is that they are generally paid on a commission basis. Closing a high-value home loan means a bigger check for them. So we see that we have two parties that are VERY interested in getting this loan closed.

    In the event of a sale, you can add the real estate agent (paid on commission but only after sale, almost always contingent on financing), the seller of the property, and the buyer (you would think the buyer would be most interested in an unbiased and frank evaluation of the property’s worth, but let me assure you that irrationality often rules when people buy houses).

    Taking a home sale as an example, we have five parties that want nothing more than for the contract to be signed, the loan to be approved, and the deal to be closed so that they can all get what they want. Money for four, a house for one. Everything usually goes stellar for them all until the appraisal. Here is where they start wringing their hands wondering if “this deal’s gonna happen,” or if “the appraiser is going to kill it.”

    As an appraiser, I can tell you that it’s relatively easy to ignore pressure from the real estate agent, the buyer, and the seller. There’s enough of those in the market that you don’t need to worry that if they get upset it’s going to have an effect on your livelihood. But in the case of lenders and their brokers, it gets tougher, and here’s why:

    Many big lenders have consolidated all of their “loan paperwork” operations into third party management firms. Generally speaking, when they start a loan, they contact this third party vendor and have them contract out things like title research, credit checks, and an appraisal. On the surface, this doesn’t seem so bad, but it has a quiet and subtle purpose that serves the purposes of the banks as far as ensuring their deals get closed and they get paid. In essence, the appraisers in an area stop dealing with bank branches or individual brokers and instead must deal with these large management firms, like eAppraiseit (some of which service several large lenders at once: see Lenders Service Inc. for a good example). The majority of the appraisal work in an area gets condensed down to being dispensed by a few big players, who basically control “fire hoses” of appraisal assignments. If you want the work, you deal with them. If you defy them or they don’t like your results, they turn off the hose and you starve.

    So the end result is that they can wield considerable influence on which appraisers in the area continue to operate and which ones will have all their work dry up. This is how they exert their influence, and is the key reason why the “independent appraiser” objectives of FIRREA have been subverted, albeit legally.

    Personally, I deal with only one of these companies any more, and only because I know I have alternatives if I ever need to tell them to take a hike (that alternative being a different line of work altogether. It’s a secret to everyone that the management firms also often surreptitiously share appraiser blacklists). So there ya have it.

  8. Sudonum says:

    @nytmare:
    The seller and their realtor set the price. Hopefully based on recent comparable sales in the same neighborhood.
    As others have stated, appraisers have known for years what the sales price is, what number they have to “hit”. It was up to them if they felt they had enough information to make the number or piss off the person paying them.

  9. wishlish says:

    I used to work for an AMC, and I’m REALLY shocked that WaMu was so blatant in their language in the emails. We had preferred appraisers, yes, but they were preferred based on their turnaround time, their service to the customer, and their competence in the market. Was there price pressure? Sure- from all parties. But if the appraiser said the deal wasn’t there, but he had done his job properly, that was that. I never heard of an appraiser being kicked off our list for not meeting values; we were more interested in getting the document back quickly and being able to reach the guy or his staff on the phone. I haven’t worked for the AMC in over 4 years, mind you.