WaMu: Shares Drop, Pressure Mounts Over Alleged Wrongdoing

New York, NYIt has been a week of tumult and turmoil for Washington Mutual and First American, since New York State Attorney General Andrew Cuomo initiated a lawsuit against First American and its real estate appraisal arm, eAppraiseIT alleging an illegal practice of inflating the values of homes to qualify for loans.

And while the Attorney General is barred from suing Washington Mutual due to jurisdictional issues, earlier this week Cuomo expanded his investigation by issuing subpoenas to government-sponsored Fannie Mae and Freddie Mac.

It is alleged that Washington Mutual, unhappy with the values coming in from appraisals, pressured First American and eAppraiseIT to unduly inflate the property values of houses qualifying for loans in an effort to boost fees. Many of these loans were allegedly packaged and sold to Fannie Mae and Freddie Mac.

Washington Mutual (WaMu) is First American's biggest customer. It is alleged that when WaMu first started complaining about the low values of appraisals coming in, First American initially resisted. However, as pressure continued, and cognizant of WaMu's status and value as a client, it is alleged that First American bowed to pressure and allowed WaMu to seek out appraisers in the eAppraiseIT unit who would be sensitive to WaMu's needs.

WaMu, First American and eAppraiseIT all deny any wrongdoing.

They also have, indirectly, the Office of Federal Housing Enterprise Oversight in their corner, after OFHEO took Attorney General Cuomo to task for issuing the subpoenas without first vetting the action through the agency. OFHEO director James Lockhart is on record as disagreeing with the subpoenas to Fannie Mae and Freddie Mac, as well as being disappointed with threats made by Cuomo relating to the aforementioned government-sponsored mortgage investors' future business activity. Lockhart's comments appeared in yesterday's edition of the [Wall Street Journal].

Regardless of the outcome of Cuomo's investigation into WaMu and First American, the fact remains the nation's sub prime mortgage market, which has virtually ground to a halt, has played a significant role in the nation's economic woes. As investors bale on the American greenback in record numbers to embrace the Canuck buck and other more attractive, if over-valued currencies, the ill-advised (and illegal) practices of inappropriately-inflating property values and goosing appraisals all in the name of financial gain, has come home to roost.

Wednesday, the Seattle bank released its outlook for the housing market next year. Not surprisingly, it's bleak. Also not surprising, given the news, was the drop in WaMu performance on the stock market, when shares of Washington Mutual nose-dived 17 per cent November 7th. WaMu could be further compromised if Fannie Mae and Freddie Mac pull their accounts, or stop purchasing loans from WaMu.

There are also huge implications for lawsuits if it is determined that improper appraisals and the inappropriate inflating of property values, have in the end cost people their homes, or livelihoods.

And the litigation will no doubt spread beyond home and hearth. On Monday of this week, an investor lawsuit was filed against Washington Mutual and First American in district court in New York, alleging securities fraud.

Given the sorry state of the nation's housing markets, and the role sub prime mortgages have played in the current debacle, industry watchers will be keeping a close eye on the WaMu situation as it unfolds.