New York State Attorney General Andrew Cuomo’s recently announced
investigation
of eAppraiselT, a division of First American reverberated throughout financial
markets on Wednesday, contributing to a 361 point loss on Wall Street.
The huge sell-off was helped along by a gloomy forecast by Washington
Mutual (WaMu), one of the principal actors in the Cuomo investigation.
In a conference with its investors WaMu revealed that its short term fortunes
were even worse than it had earlier predicted.
The company said that its 2007 credit losses will probably be around $2.7 to
$2.9 billion and that, continuing into 2008, its first quarter losses will probably
continue the pattern of the fourth quarter of this year. The 2007 projections
are nearly double those made by the company in July when several years of risky
subprime lending were beginning to take their toll. The company also said that
additional staff cuts might be necessary.
Investors were told that data from Fannie Mae indicates that only
$1.5
trillion in mortgages will be originated next year industry wide compared
to $2.8 trillion in originations in 2006. Earlier predictions had put the total
originations at $2.4 trillion.
Meanwhile, the Cuomo investigation continued. Yesterday Cuomo announced that
he had sent Letters of Notice and Demand to Freddie Mac and Fannie Mae notifying
them he was issuing Martin Act subpoenas and a demand that an Independent Examiner
be named to conduct a total review of appraisals underlying mortgages purchased
by the two government sponsored enterprises (GSEs) particularly those they purchased
from WaMu. It has been suggested, as part of the probe, that WaMu pressured
eAppraiselT, one of the country’s largest appraisal management companies,
to select appraisers only from a panel hand-picked by WaMu on the basis of a
willingness to bring in value estimates that supported WaMu underwriting.
Cuomo said, "The subject of the investigation is what they (Freddie and
Fannie) knew, when they knew it and what they did about it,"
Both of the GSEs said they would cooperate with Cuomo and appoint Independent
Examiner(s) that would meet with Cuomo’s approval.
WaMu responded to the Cuomo investigation with a statement
on Wednesday saying it took “any allegations of improper practices seriously,”
and is continuing its investigation into this matter. The company said both
Freddie and Fannie have confirmed they will continue to purchase loans from
WaMu under existing contracts.
The market reacted strongly to the double Washington Mutual whammy. The Dow
Jones, as stated above, fell 361 points and WaMu stock lost $4.19 or 17 percent
of its value, closing at $20.04. The stock has dropped 56 percent this year.
Fannie Mae shares fell 10 percent to $49.79 and Freddie Mac finished the day
at $45.13, down $4.25 or 8.6 percent.