Indecent Appraisal
How WaMu cut out the appraisers who were supposed to safeguard its home loans.
In his 18 years as a real estate appraiser, Barry C. Wilson had valued hundreds of homes for Washington Mutual Bank. Eight to 10 times a month the bank would call with the address of a property that a customer was trying to buy or refinance, and Wilson would do what appraisers traditionally did. He would examine the house inside and out, then find three nearby comparable properties that had sold recently; often he’d have to examine eight or more to find three good “comps.” Wilson would add and deduct the pluses and minuses in each property, crunch all this data, and come up with a best estimate of the target property’s actual value. The bank’s own review appraisers would vet Wilson’s work and, based on that recommendation, either approve the loan or reject the property as overpriced and, hence, at risk of future foreclosure. WaMu would pay the appraisal company Wilson worked for about $400—the going rate for more than a decade—and pass the charge along to the borrower.
Then, in 2004, Wilson got a call from Lending Services Inc., one of several appraisal management companies (AMCs) to which WaMu and many other banks had lately begun outsourcing appraisal ordering and oversight. “I need a house appraised,” the voice on the line said. “I’ve got someone who will do it for $325. If you can do it for less, the job’s yours.” Wilson thought. He typically spent five to seven hours on an appraisal, double-checking to make sure he had the best data available. Others claimed they could do two or more in a day, but he knew they were cutting corners. “I know quality,” he told the LSI functionary, “and no one can deliver it for that.”
Outsourcing to the AMCs was the last of several shifts in WaMu’s appraisal practices over the past decade. Together these changes laid the groundwork for a series of unfortunate events: the housing bubble that burst in 2006 and 2007; the September 2008 collapse of Washington Mutual, Seattle’s hometown bank and America’s largest savings and loan, under a mountain of bad mortgages; WaMu’s forced bargain-basement sale to J. P. Morgan Chase; and the metastasizing global financial and economic crisis that followed America’s housing bust.
The standard narrative, as recounted in a gathering storm of lawsuits, is that WaMu’s collapse resulted from decisions made and actions taken beginning in 2005. At the start of that year Stephen J. Rotella, previously CEO of Chase Home Finance, became WaMu’s president and chief operating officer—the key appointment in CEO Kerry Killinger’s effort to develop a succession.
Rotella, whose corporate bio highlighted his experience “directly managing the prime, subprime, and home-equity businesses” at Chase, was tapped to rev up WaMu’s then-lagging mortgage business. He brought a new management team, including several old colleagues from J. P. Morgan Chase, and a new hard-charging, hard-edged style to the once-collegial “Friend of the Family” (as Washington Mutual used to call itself, before it became WaMu and got “Whoo Hoo”). “It was a different company than it used be,” says Robert J. Flowers, a longtime WaMu senior vice president who retired in 2005 amid the management shake-up. “It had a different culture,” including a more aggressive “credit culture, in terms of the amount of risk the bank would take on.”
In November of last year a weighty class-action lawsuit was filed against WaMu on behalf of the Ontario Teachers’ Pension Plan Board and other stockholders. The 470-page complaint cites the testimony of dozens of former executives and employees on the advent of this riskier lending stance: “Starting in 2005 [WaMu] allowed companies to do ‘whatever’ was necessary ‘to get a loan approved.’” “The Company’s risk management practices deteriorated significantly in late 2005 as its business plan contemplated significant increases in higher-risk lending.” “Beginning in 2006, with the Company’s focus on amplifying loan volume in an effort to generate more money, management in Seattle abandoned ‘the basic tenants [sic] of underwriting and risk.’”
“Higher-risk” can mean lending to people who can’t afford to repay, including many subprime and undocumented “stated income” (aka “liars’ loan”) borrowers and those who get rolled by adjustable-rate loans with low initial “teaser” payments that subsequently soar. And it can mean lending more than properties are worth, a recipe for foreclosure.
The class-action suit, another suit WaMu settled with a California appraiser, and a fraud case brought last year by New York’s attorney general all contend that WaMu pressured appraisal management companies to deliver valuations that would justify inflated loans. It did so in part, the suits claim, by forcing the AMCs to contract only with “preferred” appraisers who could be counted on to “hit the numbers.” This pressure supposedly began in 2006 when WaMu began outsourcing appraisals to eAppraiseIT and others.
In fact, the integrity of WaMu’s appraisals, hence the viability of its home loans, began deteriorating long before that. “The arrow was launched as far back as 1999,” says Mercer Island–based appraiser Richard Hagar, who drastically scaled back his business rather than cut his fees to satisfy the AMCs; he now does appraisals for banks suing bad appraisers and teaches classes on mortgage fraud. Hagar traces the erosion of WaMu’s appraisal practices to CEO Killinger, who launched a rapid nationwide expansion in the ’90s: “He was very good at running a retail bank, but in mortgages he didn’t seem to know what he was doing.”
Published: January 2009
