The lawsuit that's got everyone buzzing in the industry -- that would be NY AG Andrew Cuomo's allegation that First American unit eAppraiseIT caved to pressure from WaMu and inflated appraisals -- could have some serious repercussions for Washington Mutual should Cuomo succeed, according to a story on MarketWatch. An analyst at Keefe Bruyette & Woods has estimated that WaMu's repurchase exposure could run into the billions:
Washington Mutual may have to set aside some $412 million to $2.1 billion in extra reserves if a lawsuit filed by New York state's attorney general against the mortgage lender succeeds, a Keefe Bruyette & Woods analyst estimated on Friday ... The lawsuit filed by Cuomo "raises an issue of considerable risk to Washington Mutual: that poorly performing securitized loans will be put back to WaMu from bondholders on the basis of fraudulent appraisals and WaMu would be forced to put bad loans back on its balance sheet," Cannon said. "In such a scenario, WaMu would have to buy the loans back at par and then mark them to market on its balance sheet." Cannon also questioned WaMu's assertion that it has no incentive to inflate the appraised value of homes that it lends against.
HW readers in the industry know that lenders make representations and warranties on loans they sell into the secondary market; a common rep is that appraisals are free from fraud. Theoretically, then, an admission of appraisal inflation would put WaMu in an uncomfortable position. I personally think it's debatable that this case would escalate to a point where First American or eAppraiseIT would be saddled with culpability -- the worst-case outlook here would seem to me to be a settlement without admission of wrong-doing where First American gets hit in the pocketbook and Cuomo gets to issue a press release about how he stuck it to the man. That being said, First American's remarks to the press on the matter suggest the title insurer is gearing up for a head-to-head fight here, so who knows? The analyst's math found that WaMu may need to repurchase $33 billion in mortgage loans covering volume associated with eAppraiseIT, equating to a need for additional reserves of $412 million. The analyst also noted a doomsday scenario where the alleged inflation practice was systemic to all lending at WaMu -- which would require an estimated $2.1 billion in reserves associated with loan repurchases. (The analyst noted the numbers were "premature" -- although if that were the case, I'm not sure why they'd be put out there in public view.)