Washington Mutual Appraisals Investigated by the SEC

Seattle, WAThe Securities and Exchange Commission (SEC) is now investigating allegations about Washington Mutual's practice of inflating home appraisals. The SEC's investigation will look at whether WaMu accurately told investors how its loans were appraised and whether the company's loans were properly disclosed to investors.

WaMu has said that it will fully cooperate with the SEC inquiry. The company has come under fire recently for allegedly pressuring appraisers to inflate the values of homes in order to close more home loans.

Inflated housing appraisals make completing home sales easier, but they can cause greater losses when home prices fall. Home appraisals are vital when determining the amount of a mortgage. If a home or property is not worth enough to support a loan, then the loan will not be approved. If the value is enough to support a loan but not as high as the borrower thinks it will be, the borrower will pay more in financing costs. Essentially, the higher a home's loan-to-value ratio, the higher the financing terms will be.

Where problems occur is when the borrower receives a loan for more than their home is really worth. By receiving too high a loan, it becomes virtually impossible for the borrower to make back the amount owed by selling the house. Furthermore, when high real estate prices drop, it becomes almost impossible to sell a home that has already been over-appraised.

People who try to take out second mortgages on their homes face trouble from high appraisals as well. The higher the appraised value of the home, the more likely the lender is to approve a second mortgage. Even a difference as little as five thousand dollars in a home's appraised value can change whether or not the second mortgage is approved. For example, a customer has a home worth $110,000, owes $100,000 on that mortgage and owes $15,000 in credit card debt. If he wants to refinance to pay of the credit card debt, the appraised value of the home must be higher than its actual value. Without an inflated appraisal, the loan cannot be refinanced.

Artificially inflated home appraisals can also raise the housing market. The cost of homes for sale is determined by the sales costs of other, similar homes in the area. When one or two homes are sold at an artificially inflated value, then other homes in the area will likewise be sold at a similar price.

According to Home Insecurity: How Widespread Appraisal Fraud Puts Homeowners at Risk, a briefing paper by Demos, appraisal fraud is a predatory lending tactic and is often aimed at minority, older and low-income buyers. The report also notes that in the Poconos area of Pennsylvania, between 1995 and 2005 one in five mortgaged homes has been foreclosed. Some families found that the difference between the price they paid for a home and the market value was as high as $80,000 and their mortgage payments often took up over half of their monthly incomes.

Customers who are affected by inflated home appraisals can hire attorneys to sue their original appraisers for negligence. They may also be able to sue for violations of their state's consumer practices acts. A knowledgeable attorney can make sure the correct paperwork is filed and all necessary evidence is preserved for a lawsuit.