Washington Mutual Home Appraisal Probe Grows, as Fannie Mae, Freddie Mac SubpoenaedNov 8, 2007 | Parker Waichman LLP
Washington Mutual, the country’s largest savings and loan, is being targeted by the New York State Attorney General’s office for allegedly inflating the appraisals of houses for which it wrote mortgages. Fraudulent appraisals have left thousands of homeowners in that state with mortgages they can’t afford, and such schemes have been blamed for the turmoil in the current housing market. Yesterday, Andrew Cuomo, the New York Attorney General, said he was expanding a probe of mortgage fraud to focus on companies that packaged home loans and that were later resold to investors.
Washington Mutual and other lenders often write mortgages and then sell them as a group to investors. Last week, Cuomo accused Washington Mutual of pressuring an appraisal company to overvalue thousands of homes. Those mortgages were then sold to investors, who Cuomo says were misled about the value of the properties.
Fannie Mae and Freddie Mac, two companies created by the federal government to expand home ownership, may have been among the investors allegedly misled by Washington Mutual. Both Fannie Mae and Freddie Mac purchase mortgage loans in bulk, and this year alone, Washington Mutual sold $24.7 billion in loans to Freddie Mac and $7.8 billion more to Fannie Mae. Yesterday, Cuomo announced that his office had subpoenaed both companies about their dealings with Washington Mutual. At a news conference, the New York Attorney General said that both Fannie Mae and Freddie Mac had also agreed to allow an independent examiner to analyze their dealings with Washington Mutual.
For its part, Washington Mutual has denied Cuomo’s allegations. However, the company said that it had launched an internal investigation into its lending practices. Representatives for both Fannie Mae and Freddie Mac also said they believed that they had good standards for evaluating the accuracy of appraisals.
Cuomo said yesterday that several other large mortgage lenders were also being investigated by his office, but he would not name them. The ultimate goal of this investigation and others like it is to improve standards in the mortgage lending industry. During the housing boom, many lenders wrote mortgages for properties that were appraised well over their true value. There was little regulation, and lenders required scant documentation to justify the mortgages they wrote. Now the collapse of the housing market has left many homeowners with loans they can’t afford and their mortgages far exceed the value of their homes. Investors who buy mortgages are now finding that their investments were never worth what they were led to believe.
The collapse of the housing market has since rippled through the economy. Stocks are down 18% for the year and the turmoil has prompted many investors to sell off US currency. As a result, the dollar is now at its lowest levels in 30 years.