SEC Probes WaMu
On Home Appraisals

The Securities and Exchange Commission is investigating how retail bank Washington Mutual Inc. handled and reported on mortgage loans that may have been based on inflated home appraisals.

The SEC's inquiry is in its infancy and involves several possible issues, including whether WaMu accurately disclosed to investors of mortgage-backed securities how its loans were appraised as well as whether the company properly accounted for its loans in financial disclosures to investors of the company, according to the people familiar with the situation.

Washington Mutual said in a statement: "We are voluntarily and fully cooperating with the SEC's inquiry as well as the [Office of Thrift Supervision]" -- WaMu's federal regulator -- "and look forward to bringing the facts to both the regulators and public."

The WaMu inquiry comes on the heels of a lawsuit filed in November by New York state Attorney General Andrew Cuomo that didn't name the bank as a defendant but alleged it exerted pressure on an appraisal company to inflate property valuations to ensure its loans went through.

WaMu said yesterday, "After spending a month and a half investigating these allegations, we can say with confidence that there has been no systematic effort by WaMu to inflate home appraisals. We take these allegations very seriously."

Last month, Freddie Mac and Fannie Mae, which acquire mortgage loans from lenders and package many of them into securities for sale to investors, agreed to appoint independent examiners to look at whether they have done enough to protect investors from the risks of inflated home appraisals, particularly on WaMu loans.

WaMu, the country's biggest savings and loan and one of the largest U.S. home-mortgage lenders, has been battered by the subprime-mortgage crisis this year. The company's stock price is down 68% this year, and its home-loans unit had a loss of $348 million in the third quarter.

The suit filed by Mr. Cuomo, which alleged that the home-appraisal unit of First American Corp. compromised the independence of appraisers it hired, also claimed that WaMu hand-picked appraisers who brought in high valuations and said bank employees pressured the appraisal company, eAppraiseIT LLC, to increase estimates that came in too low.

According to the suit, eAppraiseIT's president wrote in an email that it would "roll over" and submit to WaMu's demands. Later, in an email, he wrote that he viewed the bank's conduct as a violation of federal regulations, which prohibit infringing on the independence of appraisers.

First American denied the allegations and has moved to dismiss the suit, arguing that Mr. Cuomo can't bring enforcement action in the area of mortgage-loan origination by federal savings and loans, which are overseen by the Office of Thrift Supervision. A court hearing on the matter has been set for February.

Lenders generally require appraisals before making home loans. The appraisal is supposed to ensure that the lender has an authoritative estimate of the property's value. An inflated appraisal can cause lenders to advance more money than the house is worth, exposing both the lender and the borrower to losses, especially when home prices fall. Critics of the appraisal business have warned for years of growing pressure on appraisers to inflate home values. Appraisers are often hired by mortgage brokers or lender employees whose incomes are based at least partly on the number of loans they get approved.

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