WaMu accused of appraisal fraud

NEW YORK (Money) -- A former real estate appraiser for Washington Mutual is suing the bank, claiming she was blacklisted last year for providing a housing market forecast that was too gloomy.

Jeniffer Wertz, who is seeking unspecified damages, says WaMu stopped accepting her appraisals in mid-2007 a month after she reported that her local housing market in California was "declining."

A pessimistic outlook makes it harder to extend outsized, risky mortgages to borrowers whose homes can't support them. But Wertz's assessment shouldn't have been controversial at the time. According to the National Association of Realtors, home prices in her hometown of Sacramento fell $9,000, or 2.5 percent, to $356,500 in the second quarter of 2007. And most economists were already characterizing the housing market as a bubble that was ready to burst.

In the lawsuit, which was filed a week ago, Wertz says she completed appraisals on two houses in May and then quickly got a call from a WaMu (WM, Fortune 500) sales manager demanding she change her outlook to "stable" so a loan could be approved.

The WaMu sales manager also demanded Wertz change her appraisal process to produce higher prices for the properties she was evaluating, according to Wertz's lawyer Stephen Danz. The higher an appraisal comes out, the more likely it is a home loan will get approved.

When Wertz refused to comply, she claims the sales manager threatened to block her from doing future appraisal work for the bank. A month later, Wertz's suit says, a third-party appraisal request assigner told her WaMu would no longer accept her work.

Wertz has her own company. She says she appraised properties for WaMu for over six years, regularly getting three orders from the bank a day. In 2006, WaMu told her she held the status of "preferred real estate vendor," because the bank had used her in the past, and her work was "proven," according to the lawsuit.

Wertz declined to directly comment for this story, referring questions to her lawyer. A WaMu spokesperson says, "We have not had the opportunity to review firsthand the allegations in Ms. Wertz's lawsuit, and in any event, we do not comment on ongoing litigation."

The suit is only the most recent claim that Washington Mutual used its status as one of the nation's largest mortgage lenders to pressure appraisers in an effort to boost its lending business.

In November, New York state Attorney General Andrew Cuomo filed a lawsuit against title company First American and its appraisal unit, eAppraiseIT. WaMu wasn't named as a defendant, but Cuomo alleged it had pressured eAppraiseIT to inflate property values.

That same month, government-sponsored mortgage companies Freddie Mac and Fannie Mae said they would name independent investigators to find out if borrowers were properly protected against the risks of inflated home appraisals, particularly on WaMu loans.

The Securities and Exchange Commission and the Office of Thrift Supervision, which is WaMu's federal regulator, also have open inquiries into whether the bank hid from investors that some of the loans it sold as mortgage-backed securities were based on inflated appraisals.

Asked about those investigations, a WaMu spokesperson says, "With regards to our appraisal practices, we have nothing new to add to our recent public statements." In the past, WaMu has said it is cooperating with the investigations and that there was no systematic effort by the bank to inflate home appraisals.

Other lenders have come under fire for the way they deal with appraisers. In 2006, Ameriquest agreed to pay $325 million to settle charges brought by several state attorneys general that it had among other things pressured appraisers into boosting home values. And last year, Ohio's attorney general sued 10 local mortgage and brokerage firms alleging they regularly asked appraisers to guarantee certain values before they would be hired.

The WaMu lawsuit and other inquiries are shedding light on how many big-bank loan officers during the housing boom got around a long-standing check on making ill-advised or fraudulent loans.

Mortgage investors generally require that banks get an appraisal before they make a loan. Appraisals are supposed to insure that banks don't lend more than a house is worth. A borrower who defaults because of inflated numbers could mean losses for the lender and mortgage investors who buy the loans in mortgage-backed securities.

But appraisers are often hired by mortgage-loan officers whose pay is based on the number and size of loans they get approved. When housing prices decline, lenders may resort to pressure in order to get the highest property appraisals possible.

"It's not just Washington Mutual. Appraisal pressure is an industry-wide epidemic," says John Taylor, president of the National Community Reinvestment Coalition, which has studied the problem. "And it is one of the major contributors to the current foreclosure crisis."

"This case is just another good example of one of the biggest dirty little secrets of the whole mortgage industry," says Pamela Crowley, who runs industry watchdog, mortgagefraudwatchlist.org. "The housing market is falling apart, and foreclosures are soaring because the properties that these banks made mortgages on are not worth what they said they were worth," she says.

Crowley, an appraiser herself, says she is unable to get work from banks because she is unwilling to push values. "There is no doubt in my mind that the lenders knew exactly what there were doing."

In the past year, a number of states, including California, where Wertz is based, have passed laws to prevent appraisal pressure.