Cuomo Subpoenas Fannie Mae, Freddie Mac In Home Appraisal Inflation Investigation

New York Attorney General, Andrew Cuomo has subpoenaed the nation’s two largest financiers of home mortgages, Fannie Mae and Freddie Mac in his investigation into the “systemic fraud” that has infected the business of real estate appraisals.

From the AG’s office:

Today’s announcement marks the latest expansion of Cuomo’s industry-wide investigation of mortgage fraud. Last week, Cuomo filed suit against First American Corporation (NYSE: FAF), and its subsidiary eAppraiseIt, one of the nation’s largest real estate appraisal management companies, for colluding with Washington Mutual to inflate the appraisal values of homes.

“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 Attorney General 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.”

The AG’s office requested information about all of the mortgage loans Frannie Mae and Freddie Mac have purchased from any bank, including WaMu, and the mortgage backed securities associated with those loans, in addition to various other information about appraisals and valuations from originating lenders.

WaMu sold $27.7 billion dollars in loans to Frannie Mae and Freddie Mac in 2007, according to the AG.

“The integrity of our mortgage system depends on independent appraisers,” said Cuomo. “Washington Mutual compromised the fairness of this system by illegally pressuring appraisers to provide inflated values. Every company that buys loans from Washington Mutual must be sure that the loans they purchased are not corrupted by this systemic fraud.”

The President of the Appraisal Institute offered a quote for the AG’s press release:

“I wish I could say I am shocked by the discoveries made by the Attorney General and his staff. Sadly, what allegedly happened between First American and Washington Mutual is not an isolated incident. Rather, it is symbolic of a problem that has plagued the appraisal industry for years,” said Terry Dunkin, President of the Appraisal Institute. “As the allegations against First American show, the mortgage industry’s dirty secret has been that banks exert tremendous pressure to extort appraisers.”



Edit Your Comment

  1. azntg says:

    Ouch. Seems like WaMu gave people the short end of the stick and they’re getting the short end of the stick in kind.

    Now, I’ll definitely be on the lookout for Wamu trying to take it out on credit card and banking customers…

  2. pinkbunnyslippers says:

    What an idiot – Freddie and Fannie are part of the solution to this crisis – not part of the problem. It serves neither of those companies to buy mortgages with inflated appraisals. Cuomo’s just looking to stir up noise here – he doesn’t even know what he’s talking about.

  3. Skiffer says:

    @pinkbunnyslippers: Actually, Fannie/Freddie do have something to gain since they securitize and re-sell the loans to the general public.

    The attached letters at the bottom of the page, after following the link, explain the issue a good bit better – they’re a very good read. In fact, they should be what’s quoted in the post…

    The investment banks and GSEs [Feddie/Fannie] may also have an interest in inflating (or at least in not questioning) the
    value of the pooled loans. The values of these loans serve as a basis for the value of their securities. As
    such, the higher the value of the loans closed, the greater the value for which the securities are sold on the
    secondary market.

  4. CappyHead says:

    I’ve been a real estate appraiser for nearly 15 years, and you would not believe the pressure we get to inflate appraisals, especially from mortgage brokers. Not a day goes by where I don’t get a call from some broker I’ve never heard of, asking me if I’ll do a “comp check”, which means they want me to tell them what some property might appraise for. I refuse to do them – how would I know what a property is worth without even seeing it in person? Unfortunately, what these outfits are doing is “number shopping”, hoping to find some clown who will promise to appraise a house for whatever number they need to make the loan work.

    The fact is, appraisers are the one party in the transaction who are supposed to be neutral, and the way the system is set up, it’s virtually impossible not to be subject to this kind of arm-twisting. I can’t tell you how many clients I’ve lost over the years because I didn’t “hit numbers” for them often enough. I’ve also “fired” a few of them because I get tired of the pressure. Fortunately, nowadays, most of my clients are banks and relocation companies who actually want competent appraisals.

    The only way to solve the problem, unfortunately, is to have a state or federally regulated roster system in which lenders can’t individually choose appraisers (this is the way VA loans work, and FHA loans used to work in a similar way.) It has drawbacks, because if you get some curmudgeon on the roster who feels his or her job is to ruin every transaction, it’s nearly impossible to remove them, but I don’t see any other way to ensure appraiser independence. I’m not going to hold my breath waiting for it to happen – the banking and investment lobby is too powerful to let something like this go through, because they’re in the business of making deals work, and pressure on appraisers is one of their favorite tools.

  5. pinkbunnyslippers says:

    @Skiffer: Eh, both companies have programs in place to prevent fraud like this, especially after the recent overhaul of their accounting practices. Besides, Fannie and Freddie make their money off of securitization fees and their retained portfolios – not the securities they’re selling. If that makes sense.

  6. drhmai says:

    In the 1980’s the turmoil in the commercial real estate sector was laid at the feet of appraisers. It appears that the groundwork for working over appraisers is once again being laid.