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.”

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Graham Albertini, who now works with Hagar, observed that erosion from the inside. Albertini was a veteran review appraiser—an in-house watchdog—at Home Savings of America, which WaMu absorbed in 1999. At WaMu he was appalled at many of the appraisals that crossed his desk: “In one case at the start I said, ‘Don’t give me any more work by this guy.’ It was fraudulent. One manager acknowledged it and said he’d tried to fire people like that, but HR wouldn’t do it. At WaMu, there was an unwritten rule: Nobody under any circumstances will get fired for incompetence.” And not just at WaMu. “To get fired at a bank as an appraiser, you had to commit a crime against persons. They were afraid of lawsuits, afraid anyone who got fired would claim discrimination.”

Contrary to bank policy, loan officers—front-office salespeople who work for commissions on the mortgages they sell—would plead with appraisers to boost valuations so their loans could close. Often they’d invoke Countrywide Home Loans, the nation’s largest mortgage lender—and the first to implode when the bubble burst—as a pace setter. “It was Countrywide this, Countrywide that,” recalls Albertini. “Loan officers would say, ‘If you don’t approve it, they’ll just go to Countrywide.’” For all that nudging, he never saw them explicitly order appraisers to hit the numbers: “They didn’t need to pressure appraisers. The bad ones just knew they’d be making people happy. They would do whatever they needed to do to come in at the loan amount.”

“At WaMu, there was an unwritten rule: Nobody under any circumstances will get fired for incompetence.”

If they didn’t, they would have to waste time answering questions and demands for “reconsideration of value.” And they would make less money. WaMu pushed appraisers to turn cases around faster—eight review appraisals a day, says Albertini, though it could take a full day to correct (i.e., redo) a bad appraisal. And it rewarded speed with generous productivity bonuses. “I told them you can get quantity or quality, but not both.”

Even resisting the push to speed up, Albertini found that productivity bonuses boosted his income by half. “Others got much more,” he recalls: WaMu appraisers could clear $15,000 a month in Washington during the boom years. “It was frustrating to see the unethical ones making so much more money.” And alarming to see what comps they came up with to justify high loan values and turn files around quickly. “I saw a nonview home in Kent compared to waterfront in Des Moines. Waterfront at Fauntleroy and waterfront in Hunts Point [a much pricier enclave]. Property in Enumclaw and property on Capitol Hill!”

At the same time WaMu and other lenders also sought to save money by automating many appraisals, using algorithms similar to the one employed by the online Zillow service. Hagar has found these computer models fairly accurate for homogeneous areas such as Bellevue’s Eastgate neighborhood. But they fare far worse in less uniform conditions: for new construction, and in older cities like Seattle, where modest and lavish homes are jumbled together. “Zillow is right about half the time and wrong about half the time,” says Hagar. “So is the professional version.” Both rely on data from county assessors, whose practices vary widely—and who rely increasingly on computer modeling themselves.

And finally, starting around 2003, the banks outsourced more and more to appraisal management companies like the one that tried to lowball Barry Wilson in 2004. The initial motive was to cut costs, not necessarily to subvert the appraisal process as charged in the lawsuits. By delegating oversight to the AMCs, WaMu was able to eliminate nearly all its own review appraisers. But that savings came at the cost of experience and quality. The AMCs made their money by shopping appraisals out to the lowest bidders, driving fees that had run $400-plus down to as little as $200 in Washington and a reported $125 in Texas. “It took the educated appraiser out of the field,” says Patrick Lamb, a member of the appraisal firm Wilson now works for. “Younger, inexperienced appraisers who didn’t have a long-term view or a reputation to uphold would fill in.” At the same time, appraisers who’d worked for established appraisal companies could strike out on their own and get work from the AMCs, as long as they delivered the desired results. “They’re isolated—there’s no coworker next to them to say ‘wait a minute’ if something isn’t right,” says Lamb. “It opened the door to abuse.”

And abuse rushed in, buoyed by surging loan volumes and valuations. Barry Wilson missed most of the party; soon after he refused to cut his fee in 2004, Washington Mutual stopped calling. Instead he’s plugged along at slower, steadier work, valuing homes for estates and divorce settlements—where hitting the number isn’t an issue. He’s not sorry. The buzz he’s heard in the trade is that federal and state investigators probing home financing abuses are targeting mortgage brokers first, then loan officers at banks. “Third will be the appraisers.” Clear back in 2005, a Spokane appraiser was sentenced to 18 months in prison for inflating home valuations at the prodding of lenders. The case was exceptional at the time. Now it seems like a bellwether.

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