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Two federal lawsuits against appraisal management companies could become weapons for mortgage-backed securities investors seeking to make lenders buy back soured loans.
June 7 -
For now, regulators are letting banks hold fees steady. But in a shaky housing market, the banks are demanding more research from appraisers, who complain of "scope creep."
May 17 -
If the audience's response during a special session on mortgage credit at the National Association of Realtors' midyear legislative meetings is any indication, appraisals are still a big issue for front-line realty agents.
May 16 -
Some consumers and sellers may be disappointed with the appraised value of a property, but professional appraisers are just fulfilling their ethical obligation to the community.
March 17
Reaction to lawsuits aimed at several of the nation's largest appraisal management companies suggests the role of appraisers in the banking industry may soon change — again.
In two lawsuits, the Federal Deposit Insurance Corp., acting as a receiver for Washington Mutual, claims that eAppraiseIT and LSI Appraisal filed several hundred enormously inflated appraisals between July 2006 and November 2007.
While the agency is seeking damages of several hundred millions of dollars, alleging "gross negligence," the more enduring consequences may affect how banks and AMCs interact.
"Because of the FDIC lawsuits, it may cause lenders to question how they use AMCs or whether they should use AMCs," said Peter Christensen, general counsel of LIA Administrators and Insurance Services. Some of the smaller AMCs "are getting calls from lenders saying we need to make some changes, and that is within the last couple of weeks." The FDIC lawsuits were filed on May 9.
In recent years, AMCs have enjoyed a close relationship with banks, and most big banks either own or have an interest in AMCs.
For example, Rels Valuation is a joint venture of Wells Fargo Home Mortgage and First American Corporation (the former parent corporation of CoreLogic), and LandSafe is an appraisal company formerly owned by Countrywide but now owned by Bank of America.
But Washington Mutual's ties to eAppraiseIT, a subsidiary of CoreLogic, and to LSI Appraisal, a subsidiary of Lender Processing Services, may have been too close during the period that the companies were providing appraisal services.
According to the FDIC, overinflated appraisals caused Washington Mutual to lose hundreds of millions of dollars.
FDIC's lawsuit against eAppraiseIT does not specify a motive for the allegedly inflating appraisals, but one filed against the company in 2007 by former New York State Attorney General Andrew Cuomo does.
The state alleged that Washington Mutual, eAppraiseIT's largest client, pressured it to inflate mortgages. The suit claimed that the company's loan production staff was able "to hand-pick appraisers who bring in appraisal values high enough to permit WaMu's loans to close."
According to Cuomo's lawsuit, Washington Mutual, under threat of stricter federal enforcement, in 2006 had turned to the appraisal companies to create the appearance of appraiser independence. But many WaMu employees had simply migrated over to the AMC; one-third of eAppraiseIT's staff appraisers were former WaMu employees and all eAppraiseIT's appraisal business managers had formerly worked at Washington Mutual, the lawsuit claimed.
(Lender Processing Services is fighting the FDIC's charges. It "believes there is no basis for a claim that LSI engaged in "gross negligence" or breach of contract," Mitch Cohen, an LPS spokesman, said in a prepared statement.
A CoreLogic spokesman referred questions about the FDIC lawsuit to a report released by the company in early May, in which CoreLogic said it "continues to believe the FDIC's factual allegations, legal theories and damage calculations have many flaws … and the company intends to defend itself vigorously.")
Whatever the merits of the Cuomo lawsuit, it did lead the Federal Housing Finance Agency to create the Home Valuation Code of Conduct in 2009. The code was supposed to provide a buffer for banks from conflicts of interest involving appraisals.
One of the most significant changes resulting from the HVCC is that lenders now have to order appraisals through channels independent of their loan production staff.
But an irony of the reforms is that they have actually ended up strengthening the role of AMCs. After the code was created, Christensen estimates that the percentage of residential loans handled by AMCs shot up from somewhere around 30%, to about 85% to 90%.
Once the code of conduct was in place, many AMCs profited from bank fees and by paying cut rates to appraisers in their approved networks.
Although AMCs were supposed to remove the conflict of interest that led to inflated property values, appraisers have said that the AMCs pressured them to inflate property values. "If you did three or four appraisals and you came in under the value that the lender needed, they [eAppraiseIT] would send it back to you for review," said Ray Miller, a recently retired appraiser from Wisconsin. "If you continually came in under the value they needed, your business went to zero." CoreLogic did not respond to Miller's comments by deadline.
Now the rationale for using AMCs is being called into question. Christensen said that the FDIC lawsuits against the AMCs show that "in some cases, they [AMCs] provide less of a buffer than no buffer at all, because they can, in certain circumstances, become a tool for manipulating appraisals in bulk."
