Real estate appraisers have complained for years that loan officers pressure them to “hit the number” -- come in with valuations that support the home sale contract price and allow the mortgage to close.

Now the attorney general of New York, Andrew Cuomo, has sued a major appraisal management company for allegedly giving in to pressure from one of the largest lenders in the country, Seattle-based Washington Mutual.

Cuomo's suit, filed in New York Supreme Court last Thursday, charges that WaMu pressured First American Corp. and its eAppraiseIT subsidiary to allow the lender to pick cooperative appraisers -- those who would hit the number -- rather than use the appraisal management company's much larger roster of independent appraisers.

The inflated valuations fraudulently added as much as $720,000 to the true market value of properties, according to the suit. Quoting extensive internal email exchanges among corporate officers, the suit charges that First American knew that WaMu's demands violated federal and state rules.

Cuomo's suit does not name WaMu itself as a defendant because of jurisdictional issues that buffer federally-chartered banks from state legal attack. In a statement, First American called Cuomo's accusations “specious” and “without foundation in fact or law.” The company claimed that the email documentation cited in the suit were “taken out of context or mischaracterized.”

WaMu, which could now face investigation by federal regulatory authorities, said it was “surprised and disappointed by the allegations,” and immediately suspended its business dealings with First American's appraisal unit.

According to Cuomo, between April 2006 and October 2007, First American performed 262,000 appraisals for WaMu. Ironically the bank hired First American to outsource its appraisal functions in response to guidance issued by federal regulators to use third-party appraisal vendors rather than rosters selected by loan officers. But according to the suit, WaMu loan officers began complaining that valuations by eAppraiseIT's independent roster were coming in too low. The bank allegedly then pressured First American to assign only appraisers on WaMu's approved list when valuation WaMu mortgage-related properties.

WaMu threatened to take its business elsewhere, and dangled the prospect of greater use of First American's other settlement services, to convince eAppraiseIT to accede to its demands.

“The blatant actions of First American and eAppraiseIt have contributed to the growing foreclosure crisis and turmoil in the housing market,” said Cuomo. “By allowing Washington Mutual to hand-pick appraisers who inflated values, First American helped set the current mortgage crisis in motion.”

According to an April 4, 2007 email quoted in the complaint, an eAppraiseIt executive vice president complained to First American corporate officers that “we as an AMC (appraisal management company) need to retain our independence from the lender or it will look like collusion … eAppraiseIt is clearly being directed who to select. The reasoning … is bogus for many reasons including the most obvious-the (hand-picked) appraisers bring in the values.”

Later that month in another email cited in the complaint, the president of eAppraiseIT said First American's arrangement with WaMu amounts to “a violation of the OCC, OTS, FDIC and USPAP influencing regulations,” all of which prohibit any interference with valuations by interested parties.

Published: November 5, 2007

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.