Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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ANDREWM . CUOMO
Attorney General
STATE OF NEW YORK
OFFICE OF THE ATTORNEGYE NERAL
120 BROADWAY
NEW YORK, NY 10271

November 6,2007

Daniel H. Mudd
President and Chief Executive Officer
Federal National Mortgage Association
3900 Wisconsin Avenue, NW
Washington, DC 20016

Dear Mr. Mudd,

Over the last nine months, the Office of the New York Attorney General (this "Office") has conducted a
wide-ranging investigation into conflicts of interest and fraud in the mortgage industry. During the course
of our investigation, we have uncovered a pattern of collusion between lenders and appraisers that has
resulted in widespread inflation of the valuations of homes.
As you no doubt are aware, lenders now regularly sell the mortgage loans they make into the financial
markets, either directly or to investment banks or Government Sponsored Enterprises ("GSEs"), such as
Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation
("Freddie Mac"). The loans are then pooled together, securitized, and sold to the general public as
mortgage backed securities.
This configuration has the effect of making the lender less vigilant against risky loans since any risk is
quickly transferred to the purchasers of the loans. Moreover, as the lender does not hold many of its loans
in its portfolio, the lender's interest in ensuring the accuracy of the appraisal backing the loan is severely
diminished. Even worse, because lender's profits are determined by the quantity of loans they
successfully close, and not the quality of those loans, there is an incentive for a lender to pressure
appraisers to reach values that will allow the loan to close, whether or not the appraisal accurately reflects
the home value.
Further jeopardizing the process, mortgage brokers and the lenders' loan production staff are almost
always paid on commission. Thus, the income of these individuals depends on whether a loan closes and
on the size of the loan. Accordingly, brokers and loan production staff have strong personal incentives to
pressure appraisers to value a home at the maximum possible amount, so that loans will close and
generate maximum commissions. For these reasons, mortgage brokers and lenders frequently subject real
estate appraisers to intense pressure to change values in appraisal reports.
The investment banks and GSEs may also have an interest in inflating (or at least in not questioning) the
value of the pooled loans. The values of these loans serve as a basis for the value of their securities. As
such, the higher the value of the loans closed, the greater the value for which the securities are sold on the
secondary market.
As part of our investigation, this office recently filed a complaint against First American
Corporation ('First Americari') and its subsidiary First American eAppraiseIT
('eAppraiseIT'), a company that performed over 260,000 appraisals for Washington
Mutual, Inc. (WaMd'). The complaint alleges that under pressure from WaMu, EA
violated the Uniform Standards of Professional Appraisal Practice ('USPAP') and federal
and state law by permitting WaMu to control the selection of property appraisers engaged
to appraise collateral for WaMu-originated mortgages based on whether the appraisers'fiit
the valueS'required to close loans. This practice led to inflated property valuations and
enabled WaMu to originate larger, more profitable, mortgages, and a greater number of
mortgages, than would have been possible had appraisals been performed, as required, by
fully independent appraisers. The complaint against First American and eAppraiseIT, is
enclosed.
We understand that Fannie Mae purchases significant numbers of purportedly
'bnformingmortgages from WaMu. The evidence shows, however, that these mortgages
may be premised on fraudulently inflated appraisals and not upon appraisals that met
USPAP and related statutory and regulatory standards. Accordingly, Fannie Mae's own
shareholders and investors who purchased securities issued by Fannie Mae may have
been harmed. Some of these shareholders and investors were New York individuals and
institutions.
In light of the above, Fannie Mae should immediately retain an Independent Examiner,
subject to this Office's approval, to investigate, review and analyze all appraisals that
support the WaMu mortgages that Fannie Mae purchases or securitizes; the manner in
which WaMu engages appraisers and manages its appraisal process; and all appraisals
conducted by First American and eAppraiseIT that support any mortgages Fannie Mae
purchases or securitizes. Should you decline to immediately retain such an Independent
Examiner, Fannie Mae should immediately cease and desist purchasing or securitizing
WaMu loans and any loans supported by First American and eAppraiseIT appraisals.
Furthermore, pressure on appraisers and inflated appraisals appear to be widespread
problems in the mortgage industry. We are, therefore, expanding our investigation to
determine the extent of Fannie Mae's knowledge of, and actions regarding, these problems
as they relate to past mortgage purchases and securitizations by Fannie Mae. For that
reason, pursuant to this Office's investigative authority under New York General Business
Law 5 352 and New York Executive Law 5 63(12), accompanying this letter is a
subpoena to Fannie Mae returnable on November 28,2007.
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Stephen

Excellent!!

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Stephen

Wall St. spooked over this.

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It seems to me Mr. Cuomo is doing just fine, as new attorney general.

This time we look at appraisers that are pretty much handcuffed by
originators who demand appraisals higher than the actual value; encouraged
to particpate or get no business from them.

The loans get funded.  They get sold into the secondary market at their
inflated value.  Sliced and diced up to the Bear Stearns and the like.

The same loan is Leveraged 8 or 10 times at the inflated appraisals amounts.

Boy, that paper has no value at all.

Keep the losses off the books so investors keep buying their crap.

Looks like fraud.  Smells like fraud.

Dee
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