By Kenneth R. Harney
Saturday, November 10, 2007

When an appraiser hired by your mortgage company confirms that the house you are buying is worth what you're paying, 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 have no equity?

Does that happen often? And what connection, if any, might inflated appraisals have to the current mess in the mortgage market?

A lawsuit filed in New York on Nov. 1 suggests that puffed-up appraisals may be common in softening markets and may be the result of collusion by some of the largest companies in American real estate.

New York state Attorney General Andrew M. Cuomo, who filed the suit against First American and its appraisal management subsidiary, eAppraiseIT, contends 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 charges 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, according to the suit, but caved rather than lose millions of dollars' worth of business that the bank could shift to competitors. An e-mail sent to senior executives by eAppraiseIT's president in February and quoted in the complaint said, "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 loans. 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 it was "surprised and disappointed by the allegations," and has suspended business with eAppraiseIT pending its investigation of the matter.

First American, a Santa Ana, Calif.-based real estate information services firm with revenue of $8.5 billion last year, said Cuomo's charges are "specious" and have "no foundation in fact or law."

Whatever the ultimate court disposition of the suit, appraisal-industry leaders say that the problem of lender interference is significant and that declining home prices are intensifying it. Frank Gregoire, chairman of the Florida Real Estate Appraisal Board and an appraiser in St. Petersburg, said, "Every appraiser deals with this stuff every day" -- routinely confronting threats of nonpayment and blacklisting if he or she refuses to play the game.

Perry "Pat" Turner, an appraiser in the Richmond area, said pressure to inflate values is so widespread that "it amounts to organized fraud by loan officers based on their need to generate fees and close deals, and then pass the loans on to Wall Street," where they get packaged into mortgage bonds, some of which are now experiencing heavy default rates.

"And they all think they're never going to get caught," Turner said.

A national survey of 1,200 appraisers last year by October Research, publisher of the industry newsletter Valuation Review, found that nine out of 10 appraisers said they had recently been intimidated or otherwise pressured to raise valuations on homes -- up from 55 percent in a similar survey in 2003.

When appraisers refused to cooperate with demands to fluff the numbers, according to the study, two out of three of them lost the client's business altogether; nearly half did not get paid for the work they had performed.

Gregoire says the First American-Washington Mutual case illuminates a serious loophole in the regulatory system: The federal government has urged banks to outsource their appraisals to ostensibly independent appraisal management firms such as eAppraiseIT in order to separate loan officers from the choice of, or direct contact with, appraisers.

"No one is checking to see how free from influence these [management companies] really are," he said. "States don't regulate them -- they're not even considered appraisers. They're brokers of appraisal services, so nobody is looking."

In areas where prices are falling and appraisal numbers are getting fudged, that could prove to be sobering news for everyone involved -- especially unsuspecting buyers.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.