New York’s attorney general has expanded his investigation of appraisal fraud at eAppraiseIT to determine whether Fannie Mae or Freddie Mac helped Washington Mutual in an alleged conspiracy to inflate fair market values. One major appraisal trade group was quoted in the state’s announcement as saying that the allegations are proof that mortgage lenders are responsible for bad appraisals.
The state’s attorney general, Andrew M. Cuomo, issued an announcement today indicating Letters of Notice and Demand have been sent to the two government sponsored enterprises “providing notice of the issuance of Martin Act subpoenas and a demand for an independent examiner.”
In his letters to Fannie’s and Freddie’s chief executive officers, the attorney general said investigations uncovered a pattern of collusion between lenders and appraisers. He explained that the securitization process, which shifts the risk to investors, has had the effect of reducing mortgage lender vigilance in underwriting. In addition, commissioned sales people only exacerbate the problem.
“Lenders’ profits are determined by the quantity of the loans they successfully close, and not the quality of those loans,” the letters said. “There is an incentive for a lender to pressure appraisers to reach values that will allow the loan to close.”
Last week, Cuomo announced a lawsuit was filed in the Supreme Court of New York, New York County, against eAppraiseIT and its parent, the First American Corp., seeking an end to the illegal relationship, penalties and disgorgement. He alleged numerous e-mails he reviewed confirmed eAppraiseIT bowed to pressure by WaMu to use a select group of “proven appraisers” that the lender knew would inflate fair market values.
But First American claimed that the “handful of e-mails” the attorney general’s allegations are based on were “taken out of context, or mischaracterized,” while WaMu explained it has no incentive to promote inflated values.
“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,” the attorney general stated in today’s release.
Cuomo claims WaMu is Fannie’s third largest customer, selling it $24.7 billion this year. He noted the Seattle-based thrift is Freddie’s 14th biggest customer, with $7.8 billion in loan sales this year.
“We are, therefore, expanding our investigation to determine the extent of Fannie Mae’s [and Freddie Mac’s] knowledge of, and actions regarding, these problems,” the letters stated.
The subpoenas require Fannie and Freddie to provide data about all mortgages acquired from any bank and the mortgage-backed securities associated with the loans, the announcement said. In addition, information about due diligence practices and appraisal valuations is also requested.
The statement said the Washington, D.C.- and McLean, Va.-based secondary lenders have agreed to New York’s demand to retain an independent examiner who will review WaMu loans acquired by the GSEs.
“The subpoenas also seek information on the due diligence practices of Fannie Mae and Freddie Mac, and their valuations of appraisals,” Cuomo said. “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.”
Fannie issued a statement today indicating full cooperation is planned with New York and that it is not in the company’s interest to guarantee mortgages with inflated appraisals. If any appraisal discrepancies are found, WaMu would be required to repurchase the affected loans.
Fannie and Freddie’s regulator, the Office of Federal Housing Enterprise Oversight, issued its own statement today indicating it has already been working with Fannie and Freddie to combat mortgage fraud.
“I look forward to hearing from the New York Attorney General’s office on the nature of his inquiry and of the requests for assistance from the GSEs that are subject to OFHEO regulation,” OFHEO Director James B. Lockhart said in the announcement.
New York’s attorney general enlisted the help of the country’s appraisers in his campaign against lenders.
“What allegedly happened between First American and Washington Mutual is not an isolated incident,” Terry Dunkin, president of the Appraisal Institute, was quoted as saying in New York’s announcement. “As the allegations against First American show, the mortgage industry’s dirty secret has been that banks exert tremendous pressure to extort appraisers.”
Freddie issued a statement indicating it would also cooperate with the investigation and that “accurate appraisals are fundamental to our effective credit risk management.”
“Freddie Mac retains the credit risk on the mortgages it securitizes,” the statement said. “We depend upon accurate appraisals.”