We explored foreclosure
fraud pretty thoroughly several years ago (search the website for "appraisal
fraud") and learned that no one was more upset over the pressure
on appraisers to bring in inflated property values than honest appraisers
themselves who were blogging on the subject and gathering signatures on petitions
for regulatory action. But what had been a hot topic, threatening to involve
lenders, loan officers, and real estate agents in addition to appraisers died
down, probably because property prices were rising so rapidly that the appraisers
couldn't legitimately inflate prices fast enough to keep up with reality.
With foreclosures mounting, homeowners finding they cannot refinance because
equity, and investors and regulators asking questions about the numbers
of loans granted at 100 to 125 percent loan to value, the appraisers and those
who employ them are once again under scrutiny.
On November 1, New York State Attorney General Andrew M. Cuomo
announced that he is bringing suit against one of the largest
real estate appraisal management companies in the country and its parent corporation
for mortgage fraud.
The company, eAppraiseIt
(EA) a subsidiary of First American
Corporation is accused in the suit of caving into pressure from Washington
(WaMu) to use a list of "Proven Appraisers" who were willing
to provide inflated appraisals of residential real estate. Cuomo said that the
scheme was outlined in numerous emails that showed EA executives knew that their
behavior was illegal but were willing to break the law to lock up WaMu's business.
"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 Attorney General Cuomo. "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."
According to a press release issued by the Attorney General's office,
EA began processing appraisals for WaMu in April of last year and the mortgage
lender quickly became EA's biggest customer. (EA is also provides title
insurance services). However, WaMu soon complained that the appraisals were
not coming in at high enough values and pressured EA to switch to employing
only appraisers from a new panel of "Proven Appraisers" that WaMu
had hand picked specifically because they inflated property values. These higher
prices allowed WaMu to close more loans at higher values. Between April 2006
and October 2007, EA provided approximately 262,000 appraisals for WaMu and
received over $50 million in fees.
In one example from the 31 page complaint, which was quoted by Amir Efrati in
the Wall Street Journal on-line, New York State alleges that EA increased its
estimate of a property to $2.3 million from $1.6 million after the company was
allegedly told by the Washington Mutual the higher number would help the loan
The press release provided the following details from what were described as
"numerous" in-house emails regarding the "Proven Appraisers" program.
- On February 22, 2007, EA's president told senior executives at
First American in regards to the program that "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
- 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
The lawsuit seeks to end the illegal relationship between
First American and EA and WaMu. It also seeks penalties and disgorgement from
First American and EA. The lawsuit alleges that First American and EA violated
appraiser independence laws, which regulate the conduct of real estate appraisers.
According to Efrati, Seattle-based WaMu is not named as a defendant in the
suit, although the suit indirectly targets the lender because as a subsidiary
of a federally chartered bank, is federally regulated. According to the complaint,
however, the bank, which generated $116 billion in residential mortgage loans
in the first three quarters of this year, ran afoul of federal guidelines set
in 1994 by Treasury Department agencies to protect appraiser independence.
Cuomo's lawsuit was filed in the Supreme Court of New York, New York County,