New York Attorney General Andrew Cuomo has initiated a lawsuit against a real estate appraisal unit of the Fortune 500 company First American Corp. He says the appraiser colluded with Washington Mutual, one of the largest savings and loan companies, to inflate home values.
According to Cuomo, the practice is widespread and has contributed to the subprime mortgage crisis.
Damaging to Investors, Homeowners
The lawsuit alleges that First American caved to pressure to inflate the values of homes so that more loans could be approved.
Cuomo says that during the housing boom, mortgage companies started leaning harder on appraisers to do that.
"We believe this is a problem all across the industry," he says. "We believe the federal government has not been effective at regulating it. We believe it has serious consequences long-term."
That's because the practice makes it easier for people to overpay for a home — or to borrow too much against their current house, Cuomo says. And now, with home prices falling, homeowners and investors are getting hurt.
Mortgages these days get sold off to Wall Street and investors can't tell what they're really worth.
Some homeowners are taking big losses if they have to sell. Also, borrowers can be unable to refinance out of a high-interest loan if a house ends up being worth tens of thousands of dollars less than they thought it was worth.
"The appraisal is there also to protect the home buyer and the consumer, who is in the process of making the largest consumer transaction of their lives — the purchase of their home," Cuomo says.
An Illegal Agreement
Cuomo alleges that First American colluded with the mortgage lender Washington Mutual to use a list of "proven appraisers" who provided inflated appraisals on homes. Cuomo points to specific e-mail correspondence where he says senior First American officials negotiated this illegal agreement.
Eric Schwartz, a member of the board of directors for the industry group the Appraisal Institute, applauds Cuomo's decision.
"I'm glad the AG's going after them if there's some illegalities involved," he says.
Schwartz, himself an appraiser, says most are honest, but some individuals and companies do give in to lenders who offer to steer business to them if they inflate home values. He agrees that the problem is growing.
"I've been in the business 28 years and I've seen more of it in the last five or six years than I've ever seen before," Schwartz says. "It needs to be a crime to put pressure on appraisers or try to coerce them in to coming up with an inflated value."
Cuomo's office is suing an appraisal arm of First American Corp. but not Washington Mutual, which attorneys say is under federal jurisdiction.