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.

Until now.

With foreclosures mounting, homeowners finding they cannot refinance because of negative 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 Mutual (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 go through.

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 business together:
  • 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 relationship..."

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, Manhattan.