Suit alleges appraisal firm hiked values

Times Staff Writers

Yielding to pressure from a big mortgage lender, a Southern California-based appraisal company inflated the value of homes nationwide, encouraging consumers to pay too much for them or to borrow against equity they didn’t have, a government lawsuit filed Thursday alleges.

The fraud suit by New York Atty. Gen. Andrew Cuomo represents the biggest regulatory crackdown yet on the type of allegedly abusive practices that many experts believe fed the housing bubble in California and elsewhere as well as the current rising tide of foreclosures.

According to the suit, Washington Mutual Inc., one of the nation’s biggest home loan companies, hired a unit of Santa Ana-based First American Corp. to do appraisals required for mortgages, but soon became unhappy. Too many valuations, the suit says, were coming in too low to justify the loan amounts.


After Washington Mutual complained to First American, the real estate service provider’s EAppraiseIT unit let the lender, its biggest customer, choose the appraisers thought to be more likely to supply a sufficiently high number for the value of a home, the suit alleges.

The lawsuit is based on e-mails written by top executives at EAppraiseIT, who initially complained about pressure from Washington Mutual for high appraisals but ultimately acquiesced to it.

“We have agreed to roll over and just do it,” Anthony R. Merlo Jr., EAppraiseIT’s president, wrote in an e-mail to First American executives in February.

Appraisals are a key part of the home-buying process. Like the borrower’s income, property values determine the amounts that banks will lend. Low valuations can force borrowers to put up more of their own money or risk having a deal unravel.

Home appraisers are supposedly independent experts, but many have long complained that they are pressured to give sky-high valuations by mortgage brokers and lenders who collect fees based on the dollar value of loans they make.

Cuomo, a former U.S. secretary of Housing and Urban Development, said the misconduct alleged in his suit wasn’t an isolated example.

“This is a case that we believe is symbolic of an industrywide problem and a long-term problem,” he said at a news conference in his lower Manhattan office.

For homeowners, the consequences are invisible when the housing market is soaring. But the damage becomes painfully apparent when prices collapse and owners are stranded with homes worth much less than they thought and mortgages that they can’t pay.

“The unfortunate reality is that with each fraudulent appraisal, with each overvalued home, that then becomes a [reference point] for the next buyer. Home prices get that much more inflated,” said Mike Larson, a real estate analyst at Weiss Research Inc., a Jupiter, Fla.-based research firm.

First American disputed Cuomo’s allegations, saying in a statement that they had “no foundation in fact or law.”

“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 statement said. “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.”

Washington Mutual also denied wrongdoing.

“We have absolutely no incentive to have appraisers inflate home values,” the company said in a statement. “In fact, inflated appraisals are contrary to our interests. We use third-party appraisal companies to make sure that appraisals are objective and accurate.”

The lender also said it was suspending its relationship with EAppraiseIT “until we can further investigate the situation.”

Cuomo’s office said it didn’t sue Washington Mutual because federal law bars it from doing so.

A spokesman for the Office of Thrift Supervision, the federal agency that regulates savings and loans, said it was unaware of Cuomo’s investigation until Thursday.

“We don’t know why the AG’s office didn’t notify us,” said the spokesman, William Ruberry.

The New York attorney general’s office claims jurisdiction to sue First American in part because it does appraisals in the state. Representatives of California Atty. Gen. Jerry Brown couldn’t be reached for comment on Cuomo’s suit or on whether he was investigating appraisers.

Washington Mutual hired EAppraiseIT in spring 2006 to comply with laws requiring that appraisers be independent and free of conflicts.

Altogether, EAppraiseIT, which is based in Poway in San Diego County, did more than 260,000 appraisals for Washington Mutual and was paid more than $50 million, according to the suit.

Soon after EAppraiseIT was hired, Washington Mutual loan officers began complaining that appraisals were too low and pushed for reassessments, the suit says.

That resulted in some properties getting higher values, sometimes much higher, according to the suit. One valuation was raised to $2.3 million from $1.6 million.

But Washington Mutual hated the reassessments because they were costly and time-consuming and left a dangerous paper trail, according to Cuomo’s office.

So the S&L; required that EAppraiseIT use people only if they were on a list of “proven” appraisers -- chosen by Washington Mutual loan officers -- who could be counted on to provide “high values,” according to the suit. EAppraiseIT officials at one point worried about the lack of appraiser independence and told First American executives they had “concerns about overvalued properties,” according to the suit.

“I think it will tarnish our reputation in the appraisal community because we are allowing WaMu to pick appraisers based on their loan officers,” David Feldman, EAppraiseIT’s executive vice president, wrote to Merlo. “It makes us look complicit.”

But EAppraiseIT acquiesced to Washington Mutual’s demands even though it knew that was wrong, according to the suit.

“We view this as a violation” of federal rules, Merlo wrote in an April 17 e-mail.

In some cases, appraisers were removed from the preferred list if their numbers were too low, the suit said.

A Washington Mutual sales assistant told one appraiser he was dumped from the list because he wouldn’t boost his assessments, according to the suit.

“I have been singled out by WaMu and have been pressured on every appraisal I have completed that did not reach a predetermined value,” another appraiser complained to EAppraiseIT. “I feel that WaMu is in the process of ‘blacklisting’ me as an approved WaMu appraiser by going after each appraisal I complete and looking for violations.”

Excessive appraisals have particularly dire consequences for so-called sub-prime borrowers who have weak or spotty credit, experts say.

“When reality sets in, as it has today, these buyers, through no fault of their own, now face foreclosure,” said Robert L. Gnaizda, general counsel of Greenlining Institute, a consumer group. “They’re paying for homes that aren’t worth anything close to what they paid.”

An independent appraiser who did work for Washington Mutual for many years and briefly for EAppraiseIT says lenders never explicitly tell appraisers to value homes at specific levels.

However, they send an “unspoken message” that additional assignments won’t be offered if values are too low, Bill King, owner of ValueOne Appraisal in Federal Way, Wash., said in an interview.

“My personal business is in the dumper because I don’t cave in” to demands for high appraisals, King said.

Long before the transactions that caught Cuomo’s eye, puffed-up appraisals were blamed for helping cripple savings and loans in the 1980s by enabling rash investments that ultimately cost taxpayers more than $100 billion.

As a result, a law enacted in 1989 requires states to license or certify appraisers working for federally insured banks and thrifts. Appraisers can lose licenses for skewing estimates to give clients the property values they seek.

But critics say state licensing has proved inadequate and pressure for appraisers to hit price targets has continued.

“Today, unscrupulous lenders and brokers have a totally free shot at the appraisal,” Alan E. Hummel, a top lobbyist for the Appraisal Institute, which represents real estate appraisers, said at a Senate hearing on mortgage abuse in June.


Hamilton reported from New York, Reckard from Los Angeles.