The lawsuit alleging fraud, filed by New York Attorney General Andrew Cuomo and announced in Manhattan last Thursday, claims that Washington Mutual hired an appraisal unit of First American Corp (FAC) to perform property valuations required for mortgage applications, but became displeased with the values coming in. They were seen as too low to justify the loans being sought.
Rather than accepting at face value the fair-market appraisals received, it is alleged that Washington Mutual complained to First American, which in turn invited Washington Mutual through FAC's eAppraiseIT unit to exercise discretion in the selection of individual appraisers thought to be more sensitive to the needs of their biggest customer—Washington Mutual (WaMu)—and come in with higher valuations more to the latter's liking.
Both Washington Mutual, and First American categorically deny the allegations.In the lawsuit, which represents the largest legal challenge to allegedly abusive practices that industry watchers claim are at the root of the country's sub-prime mortgage woes, it is suggested that eAppraiseIT initially complained about pressure stemming from Washington Mutual, but in the end cried uncle and gave in.
The New York fraud lawsuit is against First American and its subsidiary eAppraiseIT and not Washington Mutual, as federal law prohibits Cuomo's office from citing the latter.
However, this is not the first time Washington Mutual as been in the news.
In 2002 the lender was embroiled in a remarkable lawsuit over the foreclosure of a home in Yorba Linda, California over the non-payment of about fifty bucks.
That year Clara and Francisco Alonso put up $62,000 of their own money for a $77,500 home, financing the remainder through a loan with Washington Mutual. All was well until the Alonsos unexpectedly fell on some hard times, and fell behind on their payments. Washington Mutual issued a notice of default, but the Alonsos responded quickly and a repayment schedule was drafted representing monthly payments of $3994.89.
According to court documents, Clara Alonso proceeded to attend Washington Mutual in person to make the first payment and asked the teller to look up the amount owing, as Alonso had forgotten the repayment agreement at home and did not have a record of the requisite amount on her person. The teller proceeded to communicate a figure of $3943.33—a sum in error by $51.56. Unaware of the discrepancy, Clara wrote a check for that amount on August 30th.
Imagine Clara and Francisco's shock when, on September 10 Washington Mutual returned their check, together with a communiqué that partial payments were not acceptable and the loan was immediately in foreclosure. Repeated attempts to contact the bank's designate proved fruitless, while WaMu issued a further communiqué that their home would be foreclosed on September 24th, and actually sold on foreclosure September 20th, literally ten days after WaMu returned the check.
All for $51.56
In the end the Alonsos won the right to remain in their home, and repay their mortgage under better terms.
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Such terms may not be available, however, to homeowners having paid inflated values for their homes. The day of reckoning comes when the market, as it always does, corrects itself. When property values collapse, any equity a homeowner has earned disappears. Worse still, is when the value of a property drops appreciably below the value of the mortgage. In this scenario everyone loses except the bank. The homeowner not only can lose his house, but also his shirt.Real Estate appraisers are supposed to be impartial and independent, but there have been complaints of pressure brought to bear by mortgage brokers and lenders to inflate values, which in turn translates into higher fees and commissions for the broker.
New York's Cuomo says the practices cited in his lawsuit are not isolated.
"This is a case that we believe is symbolic of an industry wide problem, and a long-term problem," he said.
