Share of Washington Mutual fell over 20% intraday on news Cuomo sends subpoenas to Freddie Mac, Fannie Mae.

New York Attorney General Andrew Cuomo said Wednesday that his office is sending subpoenas to Freddie Mac (FRE) and Fannie Mae (FNM) and is asking the companies to retain an independent examiner to review certain mortgages and appraisals as part of his probe into the mortgage industry.

In a press release, Cuomo said Freddie Mac and Fannie Mae have agreed to retain an independent examiner to conduct a total review of all Washington Mutual Inc. (WM) appraisals and mortgages they purchased.

“In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual’s mortgages have not been corrupted by inflated appraisals,” Cuomo said.

Last week, Cuomo sued First American Corp. (FAF) and its eAppraiseIT unit for allegedly colluding with Washington Mutual to use a list of preferred appraisers to artificially inflate mortgage appraisals.

Washington Mutual isn’t a defendant in Cuomo’s suit, which was filed in New York State Supreme Court in Manhattan.

Cuomo’s office is examining potential conflicts of interest in the appraisal process as well as the securitization of mortgage loans, particularly subprime loans.

The SFGate version of the story is N.Y.’s Cuomo alleges appraiser, lender collusion upped home values

Andrew Cuomo sued a leading nationwide real estate appraisal management firm and its parent company on Thursday for allegedly colluding with the nation’s largest savings and loan firm to inflate the appraised values of homes.

The lawsuit said that First American eAppraiseIT, a subsidiary of Fortune 500 company First American Corp., caved in to pressure from Washington Mutual to rely on “proven appraisers” who were willing to inflate home prices.

Washington Mutual profited from the artificially high appraisals because they allowed the company to close more home loans at greater values, the lawsuit said. First American, a provider of business information, title insurance and related services, wanted to win more business from Washington Mutual, the suit said.

Cuomo said fraudulent appraisal practices were pervasive in the industry. At a news conference announcing the lawsuit, he said lenders, mortgage brokers, real estate agents and others frequently pressured appraisers to “come in with the right number, the number that justifies the transaction” so that everyone in the chain would receive commissions.

In response to questions about whether he will charge other companies, the attorney general said his investigation is continuing.

“The appraisal process is a systemic weakness, in our opinion, in the housing industry,” Cuomo said. “This is a case we believe is symbolic of an industrywide problem, a long-term problem.”

Cuomo said a nine-month investigation uncovered numerous e-mails from senior executives at the companies showing that eAppraiseIT intentionally broke the law to win future business with Washington Mutual.

First American said the e-mails were taken out of context or mischaracterized.

“The independence of the appraiser is essential to maintaining the integrity of the mortgage industry,” Cuomo said. “First American and eAppraiseIT violated that independence when Washington Mutual strong-armed them into a system designed to rip off homeowners and investors alike. … By allowing Washington Mutual to hand-pick appraisers who inflated home values, First American helped set the current mortgage crisis in motion.”

Bloomberg is reporting Cuomo Widens Mortgage Probe, Taps Fannie, Freddie.

Cuomo is demanding Fannie Mae and Freddie Mac, the two biggest U.S. providers of home loan financing, hand over details of loans they buy that may show appraisal values on homes were illegally inflated.

The attorney general said he uncovered a “pattern of collusion” between lenders and appraisers and said he is targeting banks beyond Seattle-based Washington Mutual.

Fannie Mae and Freddie Mac agreed to supply documents, Cuomo said, giving the attorney general access to information on some of the $11.5 trillion of mortgages they own or guarantee.

“We believe it is widespread, it is prevalent,” Cuomo said today at a press conference. “In this case follow the money, the old expression, is follow the mortgage.”

Washington Mutual shares tumbled after Cuomo’s announcement. The stock fell $3.99, or 16 percent, to $20.24 at 2:04 p.m. Earlier, the shares dropped 19 percent, the biggest decline in 20 years.

Washington Mutual is the third largest provider of loans to Fannie Mae, selling $24.7 billion in loans in 2007 alone, Cuomo said. Washington Mutual is also the fourteenth largest provider of loans to Freddie Mac, selling $7.8 billion in loans in 2007, he said.

Where There’s Smoke There’s Fire

The San Francisco Chronicle is reporting California appraisers say they’re pushed to inflate home prices

Ask any real estate appraiser: Being badgered to overstate home prices is a fact of life, they’ll say.

“We get pressured every single day to inflate our values,” said Dan Tosh, principal at Tosh & Associates, an appraisal firm in Brentwood. “We get people telling us we’ll never work again, or they won’t pay us because we won’t play ball.”

“This makes things such as Enron and WorldCom look small by comparison,” said Ted Faravelli, executive director of the California Association of Real Estate Appraisers and principal at San Jose’s T.E. Faravelli & Associates, an appraisal firm. “It was an epidemic.”

In a nationwide survey released early this year, 90 percent of 1,200 appraisers said they had felt “uncomfortable pressure” to adjust property values. Mortgage brokers were named as the most common culprits, followed by real estate agents, consumers, lenders and appraisal management companies. The increase in pressure was dramatic compared with that found in a similar survey in 2003, when 55 percent of appraisers reported feeling pressured.

“Pressure on appraisers reaches pandemic proportions,” said David Hutton, senior editor at October Research Corp., the Ohio company that conducted the study. “The New York lawsuit … may be just the tip of the iceberg.”

Regulators say it is difficult to clamp down on the practice without a smoking gun.

The case filed in New York may have a smoking gun: The attorney general’s office uncovered e-mails from the appraisal firm First American eAppraiseIT that appeared to discuss pressure from lender Washington Mutual to pump up prices.

Washington Mutual Daily Chart

click on chart for sharper image

Add Washington Mutual to the list of companies fighting for its financial life. If Washington Mutual has to buy back those loans from Fannie Mae, the patient will die. It’s as simple as that.

Mike Shedlock / Mish
Click Here
To Scroll Thru My Five Most Recent Posts