New York State Attorney General Andrew Cuomo's office charged today in a civil lawsuit that the nation's largest mortgage and property services corporation, its home appraisal subsidiary and the nation's largest savings and loan giant conspired to inflate the value of home appraisals, earning higher profits for the bank but leaving homeowners holding potentially risky debt loads.
And the attorney general says his office has the e-mails to prove it.
According to civil court papers filed in New York City, at least 50 e-mails between executives from the mortgage and property services conglomerate, First American Corporation, its wholly owned subsidiary, eAppraiseIT, and Washington Mutual document a "raise the value" scheme.
According to the attorney general's office, the scheme was hatched in an effort to satisfy the demands of savings and loan giant Washington Mutual that would in turn allow IT to write an increased amount of loans for more money.THE BLOTTER RECOMMENDS
"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 Cuomo in a statement.
While profitable for Washington Mutual, the loans, especially in a declining housing market, put consumers at risk of being "upside down" on their home loans, the AG's office said. In that situation, should they attempt to sell or refinance their property, they might owe more in loans than the property is actually worth.
"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," Cuomo said.
To carry out the scheme, Washington Mutual allegedly asked that eAppraiseIT -- which performs about 50,000 appraisals a month nationally -- to use a "preferred list" of independent appraisers rather than appraisers from its own staff of more than 12,500 who, according to the court papers, were not bringing in the property values that Washington Mutual was seeking.
For eAppraiseIT, the alleged directive was a bitter pill. Not only was it potentially illegal, but it also reduced profitability on each appraisal as a result of higher fees to the outside appraisers, according to e-mails in the court papers.
"We've agreed to roll over and just do it," wrote Anthony Merlo, the president of eAppraiseIT, in an e-mail to First American Corporation on Feb. 22, 2007. "In short, we will now assign all Wamu's (Washington Mutual's) work to Wamu's 'Proven Appraisers' (bypassing our Staff and Elites, including the ones we hired from Wamu)..."
He sent a follow up e-mail on April 17 noting that he viewed the practice "as a violation" of rules and regulations issued by the Federal Deposit Insurance Corporation (FDIC), the Uniform Standards of Professional Appraisal Practice (USPAP), the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC).
"In short, the issues are using their designated appraisers as mandated by the Wamu production force...and bypassing our panel. We view this as a violation of the OCC, OTS, FDIC and USPAP influencing regulation," Merlo wrote.
Still the stakes were high, and the practice allegedly continued.
"This is conduct that is going on today," Eric Corngold, executive deputy attorney general for Economic Justice, told ABC News.
In exchange for caving in to pressure from Washington Mutual, the conglomerate First American hoped to win new business for its Title and Flood insurance practices, Corngold said.
"[The President of WaMu Mortgage] said that if the appraisal issues are resolved and things are working well he would welcome conversations about expanding our relationship including tax and flood," the vice chairman of First American wrote to executives at First American and eAppraiseIT on Sept. 27, 2006.
First American's title insurance and services company is the largest in the U.S. And it is but one of several market-leading companies in the First American family. Others include Specialty Insurance, Mortgage Information, Property Information and Risk Mitigation and Business Solutions.
In May, Cuomo issued a subpoena to eAppraiseIT seeking information about appraisals performed throughout New York where it performs about 15,000 appraisals a year, according to Bloomberg News.
"It's a very good thing, what the attorney general is doing," Merlo said in an account published at the time. Cuomo's office was focused on "who's exerting the pressure" on appraisers, he said.
First American issued the following statement in response to the lawsuit: "The complaint filed today by the New York Attorney General against First American and our eAppraiseIT subsidiary has no foundation in fact or law. We are dismayed by any impact these specious allegations may have on our company, on our many employees and on our valued customer, Washington Mutual. The Attorney General's allegations, largely based on a handful of e-mails that have been taken out of context, or mischaracterized, and an incomplete review of the facts, belie our record of compliance with applicable law. The program called into question today by the Attorney General has been vetted and approved by the federal regulator responsible for oversight of such programs. We welcome the opportunity to now present all the facts before an impartial third party. In that presentation, we will demonstrate the appropriateness of our appraisal practices in the state of New York and we will vigorously defend the reputation of Washington Mutual and the reputation we have labored more than 100 years to build."
Anna Rojas, the assistant to Anthony Merlo, the president of eAppraiseIT, told ABC News, that although Merlo had in the past spoken to the press, at this point all calls had to go through their media office. Washington Mutual, although strongly implicated by Cuomo in his remarks and legal papers, is not a party to the civil suit. The attorney general does not have the authority to file suit against a federally chartered bank, the attorney general's office said.
When it learned of the lawsuit by New York's attorney general, Washington Mutual said in a statement issued by Libby Hutchinson, senior vice president and public relations manager, "We are surprised and disappointed by the allegations in the complaint related to eAppraiseIT. We are suspending our relationship with eAppraiseIT until we can further investigate the situation. We have absolutely no incentive to have appraisers inflate home values. In fact, inflated appraisals are contrary to our interests. We use third-party appraisal companies to make sure that appraisals are objective and accurate." News of the fresh woes for lenders and the lending industry comes just hours after a report shows that housing loan foreclosures have doubled.
According to RealtyTrac, the number of homes that received a foreclosure notice doubled from July to September of 2007 compared to the same period a year earlier. The online foreclosure database company reports this morning that 635,159 foreclosure filings were served on 446,726 actual properties during those three months when the mortgage meltdown really kicked off.
For the same period last year, 223,363 homes received a foreclosure notice.
This post has been updated.