The FDIC has sued two appraisal management companies (AMCs) and 89 appraisers for faulty appraisals that led to the collapse of Washington Mutual in September 2008. The lawsuit alleges gross negligence and breach of contract, and seeks slightly over $129 million in damages.
The complaint charges the AMCs with hiring inexperienced appraisers who provided substantially inflated real estate values.The whole appraisal process, as described in the lawsuit, was pretty frightening. The AMCs hired inexperienced low-fee appraisers who could deliver turnaround times of a few days. When completed, each appraisal was transmitted to Bangalore, India for “administrative review.” This consisted of making sure all the boxes were checked, basically. If the appraiser omitted some piece of information on the checklist, then the appraisal was sent to Connecticut for “technical review.” That consisted of contacting the appraiser for whatever piece of information was left off the checklist. Once that was corrected, the appraisal was sent to WaMu, who presumbably thought they were getting a good appraisal that had undergone a review appraisal process. Normal people would think an appraisal review process would include an experienced appraiser looking over the work of other appraisers to confirm accuracy. That’s not what happened.
Out of the 259 appraisals reviewed by the FDIC for accuracy, only SEVEN fully complied with professional standards. A whopping 194 of the 259 contained “multiple egregious violations” of regulations and industry standards. That word is pronounced eh-gree-jus; it’s what lawyers say instead of “outstandingly terrible” or “blatantly horrific” or something similar.
In one example, a property in California was appraised in May 2007 for $5.9 million. This was after the markets started declining in the area. The appraiser ignored recent comparables in the $3 million range, and used real estate boom prices from two years earlier in order to support his value. After the predictable foreclosure, WaMu lost over $1.5 million on its $4 million loan.
Another example, from Florida, was a condo unit appraised at $3.18 million, supporting a loan of $2.54 million. Unfortunately, the SAME unit sold the day before for only $1.98 million, and two years earlier sold for $1.6 million. The $1.6 million sale was in the public records, but was not part of the appraisal. The $1.98 million sale was not yet in the public records, but the purchaser in the $1.6 million transaction was not the same person as the seller in the transaction that needed the appraisal. Reasonable minds would have wondered, “Has there been another sale of this property? Should I ask more questions?”
I thought one of the more interesting parts of the lawsuit was on Page 5, where we read: “Real estate appraisals are intended to provide borrowers and lenders with an independent and accurate assessment of the market value of a home. This ensures that a mortgage or home equity loan is not under-collateralized, which in turn protects borrowers from being over-extended financially and lenders and investors from losses if the borrower defaults on the loan.”
Not just WAMU borrowers, but millions of other borrowers nationwide have been complaining that over-inflated bank appraisals led them to buy more house than they could afford. Lenders vigorously defended borrower lawsuits containing those allegations, claiming that the appraisal was for the lender’s benefit, not the borrower’s. Now, the FDIC says the loan appraisals were for the benefit of lender AND borrower. Is the FDIC going to be stuck with those words? What if your loan was with IndyMac, Amtrust, Colonial Bank, or some other bank taken over by the FDIC? Your loan was probably sold by the FDIC to a successor bank, and the FDIC probably agreed to repay the successor for a certain percentage of any losses suffered on your loan.
In a situation where loans pass through the hands of the FDIC, on their way to ownership by another bank, those borrowers lose many of the lawsuit defenses they might have had if the failed bank had sued them. Is this now a bright spot, balancing the scales of justice? Will passing through the hands of the FDIC cause this “appraisal reliance” defense to “stick” to the loan, and be available for borrowers if they are sued for a post-foreclosure deficiency?
I think we’re going to see a lot more on this issue. As always, I’ll keep you posted.