Why NY AG Cuomo’s Appraisal Investigation Has Implications Beyond Inflated Appraisals

by Alex Stenback on November 8, 2007

NY State Attorney General Cuomo’s suit over appraisal practices at Washington Mutual/E-AppraiseIT, (also the subject of the latest meltdown by Jim Cramer, who likened going after mortgage lenders in this environment to throwing "gas on the Kingsfords") may have broad implications for the mortgage industry.

Taken at face value, the investigation appears to be aimed at regining in the behavior of Washington Mutual and it’s appraisal management company, eAppraiseIT, which was allegedly pressured by WAMU to provide inflated appraisals to keep the deals flowing.

But, as the inimitable Tanta (over at Calculated Risk) points out, there is more to this than meets the eye:

This is very interesting precisely because it isn’t going to be about inflated appraisals. It’s going to be about how far anyone can get away with two practices that are the lynch-pins of the mortgage industry: outsourcing regulatory liability to a third party bag-holder and doing business on a representation and warranty basis without pre-sale due diligence.

…it’s about stopping the game of risk-layoff. The weakest (financially and politically) party in the chain, eAppraiseIT, appears to have taken on all the residual risks from WaMu and Fannie Mae, and now Cuomo is going to force those losses to materialize…The results will be very, very ugly.

Fascinating stuff.
WAMU and the Rep WAR [CR]

{ 4 comments… read them below or add one }

Lisa November 21, 2007 at 1:03 pm

Hi All –

I work with a Seattle-based law firm that is investigating Washington Mutual and First American Corporation based on complaints the companies have conspired to artificially inflate housing appraisals.

As I am sure you are all well aware the appraisal of a home is important when determining the loan you will receive, including monthly payments, APR and more. If these prices were artificially inflated to benefit WaMu and First American it could mean you have overpaid for your home and subsequently have an inflated mortgage.

This could also cause problems if you ever fall behind on your loan—another lender isn’t going to accept the inflated value of your home–meaning you can’t refinance.

If you have a home loan from Washington Mutual you can learn more about this investigation by visiting http://www.hbsslaw.com/wm.htm.

Bran November 23, 2007 at 2:31 pm

The problem as I see it is the management companies want to be profitable and are willing to pay appraisers doing the work nothing. The only ones making money is the AMC and they have no accountability! When something goes wrong it is the appraiser’s fault. Could it be that the job was rushed, was there some pressure though never mentioned that the faster you send back a report the faster you get a new order? What makes everyone look bad is that it is never the AMC fault, but always the appraiser who took the assignment? The AMC have found a way to legally make money off appraiser. Imagine if the AMC were able to find a way to collect a commission off or every home sold? Or if the AMC told the listing/selling realtors that I know the area has a commission rate of xx percent, but you are only going to get 1 percent of the total amount. The centralization and the constant streamlining of the appraisal process caused so many qualified appraisers’ to leave the profession. The AMC are acting like a monopolistic company and if you do not work for their fees or terms no work is given to the appraiser. Large lenders have allowed this to happen by relinquishing all appraisal control to the so called AMC. The main concern is not quality of work but how CHEAP can you work for. Do many know that you cannot get any work from a bank unless you are willing to go through the AMC? Look at Wells Fargo, the own RELS Valuation, RELS has a separate division that does work for Chase Manhattan Bank. Are fee lowered so that the larger corporation can show that they are profitable to their share holders? How can a small appraisal company regulated by USPAP and other concerns compete on a large scale? The AMC talk about quality, but what percentage of the appraisals completed came from AMC and are AMC ever to blame? Apparently not, the ones that always get the bad publicity is the Appraiser. AMC are never to blame, they are always the solution, so one is lead to believe. Maybe on the larger scale there is a strategy by the LENDERS and AMC which is to get rid of most appraisals so they can go to automated valuation models? Who knows, once the appraiser is gone they can go to the regulators and say they have no choice but to use this option. When all else fails, they will go to the good old tax payer and ask for a government bailout.

R. April 24, 2008 at 7:01 pm

The AMCs are well designed profit centers which recognized the necessary appraiser traits of independence and objectivity can be against us to create competition among appraisers and minimze appraisal fees.

If appraisers organized into a cohesive orgainzed group collective bargaining could be utilized to increase the fees paid. AMCs not willing to pay reasonable fees would be boycotted and soon feel the economic pinch.

Together we stand, divided we fall was never more true. Appraiser objectivity, independence, competence and reasonable compensation should not be optional.

renee July 11, 2008 at 12:17 am

I await the day the Appraisal Insitute or another group of brave appraisers actually get some backbone and supports their residential real estate appraisers by filing a class-action law suit against the likes of Wells Fargo and RELS for restraint of trade, deception, coercion and all the other things that in my opinon they engage in their appraisal ordering and selection process that further undermines the financial feasibility of the mortage industry.

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