WASHINGTON -- When an appraiser hired by your mortgage company confirms that the house you bought is worth what you paid, that's reassuring.
But what if the appraiser was pressured to fudge the number? What if the house is actually worth $20,000 or $40,000 less than you paid, and you've got no equity?
Does that happen very often? And what connection, if any, might inflated appraisals have with the current mess in the mortgage market?
A suit filed Nov. 1 in New York suggests that puffed-up appraisals not only may be commonplace in softening markets, but also could be the result of collusion by some of the largest companies in American real estate.
New York Atty. Gen. Andrew M. Cuomo, who filed the suit against First American Corp. and its appraisal management subsidiary, eAppraiseIT, believes that inflated appraisals have "contributed to the growing foreclosure crisis and turmoil in the housing market."
Cuomo's suit, which rattled mortgage lenders, appraisers and settlement service companies nationwide, accused First American and eAppraiseIT of knuckling under to illegal pressure from Washington Mutual, the giant Seattle-based lender, to hit the numbers needed to close loan deals.
Citing extensive internal e-mails, the suit charged that Washington Mutual demanded that eAppraiseIT use the bank's preferred list of appraisers -- who allegedly had demonstrated their willingness to inflate values -- rather than eAppraiseIT's regular roster of independent appraisers.
Executives at eAppraiseIT knew that agreeing to Washington Mutual's demands would violate federal and state laws, but they caved rather than lose millions of dollars worth of business that the bank could shift to competitors, according to the suit. An e-mail sent to senior executives by eAppraiseIT's president last February and quoted in the complaint read, "We have agreed to roll over and just do it."
From April 2006 to last month, eAppraiseIT supplied about 262,000 appraisals to the bank in connection with home financings. Post-closing reviews of nine appraisals performed on New York properties by Washington Mutual's preferred appraisers found higher than accurate numbers in every one, according to the suit. The alleged padding ranged from $5,000 to $720,000.
Washington Mutual was not named as a defendant in the complaint because, as a federally regulated bank, it is buffered from certain state legal attacks. In a statement, Washington Mutual said that it was "surprised and disappointed by the allegations" and that it had suspended business with eAppraiseIT pending its own investigation of the matter.
