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.