Less than a week after announcing that he is suing eAppraiseIT and The First American Corporation for allegedly conspiring with Washington Mutual to inflate appraisals, New York Attorney General Andrew M. Cuomo has issued Martin Act subpoenas to government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae.
In a letter from Cuomo to Daniel H. Mudd, Fannie Mae's president and CEO, the attorney general notes that his office "uncovered a pattern of collusion between lenders and appraisers that has resulted in widespread inflation of the valuations of homes." Cuomo sent a similar letter to Freddie Mac's chairman and CEO, Richard F. Syron.
"Brokers and loan production staff have strong personal incentives to pressure appraisers to value a home at the maximum possible amount, so that loans will close and generate maximum commissions," the letter states.
Cuomo's letter, however, does not place culpability squarely on mortgage brokers' shoulders, noting that "investment banks and GSEs may also have an interest in inflating – or at least in not questioning – the value of the pooled loans."
"The values of these loans serve as a basis for the value of their securities," the letter continues. "As such, the higher the value of the loans closed, the greater the value for which the securities are sold on the secondary market."
Of course, the attorney general's office is seeking to protect and defend GSE shareholders and investors, who "may have been harmed" in the course of purchasing securities backed by home mortgages carrying possibly fraudulently inflated appraisals.
Thus, Cuomo has directed Fannie and Freddie to "immediately retain" independent examiners to assess all the appraisals that support Washington Mutual mortgages, as well as all appraisals conducted by First American and eAppraiseIT.
Moreover, Cuomo has noted that his office will be expanding its investigation "to determine the extent of [the GSEs'] knowledge of, and actions regarding, these problems as they relate to past mortgage purchases and securitizations."
In response to the attorney general's actions, Freddie Mac issued a statement, noting that accurate appraisals support its credit-risk management efforts. The company says it works closely with lenders "to ensure that all loan information is accurate."
"We are pleased to cooperate with the New York attorney general's investigation and have agreed to appoint an independent examiner, as requested," Freddie Mac says.
In a press statement issued after the release of Cuomo's GSE-related announcement, Washington Mutual defended the integrity of its business operations and announced its legal department was conducting its own investigation of the allegations in the complaints.
"The company takes any allegations of improper practices seriously, and is continuing its investigation into this matter," the statement said. "The company will continue to pursue its policy of ensuring that its operations comply with all applicable laws. In addition, the company will vigorously defend itself from all unfounded allegations and lawsuits."
The Washington Mutual statement added that "fewer than 5 percent of the appraisals performed under this contract were related to subprime loans."
– Michael Bates, Servicing Management