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New York High Court Allows Lawsuit Alleging Appraisal Company Inflated Home Prices - People v. First American Corp.

December 7, 2011

As San Bernardino foreclosure defense attorneys, we read a lot in the early days of the mortgage crisis about contributions to the bubble from mortgage professionals. In the days when mortgage lending was easy, some observers say, banks made credit far too easy to obtain and pressured prices upward, knowing they would quickly securitize the loans and face no risk. Sometimes, the appraiser responsible for ensuring the home's price was fair would be corrupt or pressured by other players to appraise the home at a higher value than it actually possessed. This kind of appraisal fraud allegation is behind the New York Court of Appeals decision in People v. First American Corp., a lawsuit brought in 2007 by then-Attorney General Andrew Cuomo of New York, now the state's governor. In this ruling, the court allowed the suit to proceed.

Cuomo alleged that First American's appraisal subsidiary, eAppraiseIt, engaged in repeated fraudulent and deceptive acts in the course of its business. Washington Mutual, a bank now owned by Chase, hired eAppraiseIt in 2006 and quickly became the appraisal firm's biggest client, providing about 30 percent of its business in the state of New York. While eAppraiseIt was supposed to remove a conflict of interests for WaMu by doing independent appraisals, the lawsuit charges that WaMu began to pressure eAppraiseIt to make the appraised values of homes higher, without apparent justification. This was "to allow the loans to proceed to closing," but of course also inflated the value of the loans the home buyers took out from WaMu. eAppraiseIt's management was aware of the pressure and at first resisted, but eventually bowed and allowed WaMu to completely control eAppraiseIt's appraisal panel, in violation of professional ethics laws. After Cuomo sued in 2007, First American tried unsuccessfully to move the case to federal court and then to have it dismissed, arguing that it was preempted by several federal laws. The Appellate Division affirmed the ruling denying a dismissal.

First American appealed to the New York Appeals Court, the highest court in the state. It had no better luck there. It argued that the federal Home Owners' Loan Act and Financial Institutions Reform, Recovery and Enforcement Act occupied the entire regulatory field for real estate appraisals, and also that the state of New York's lawsuit impermissibly attempted regulation that impeded WaMu's ability to finance real estate transactions. In its analysis, the high court said this case is about implied or field preemption, in which federal law is so pervasive that it leaves no room for state laws. The court disagreed with First American that this was the case for HOLA and FIRREA. HOLA created a board that was the precursor to the Office of Thrift Supervision; FIRREA created the OTS. The laws regulate federal savings & loan institutions, and FIRREA established uniform national real estate appraisal standards. FIRREA expressly permits state regulation, the court said, through state appraisal licensing. Furthermore, the lawsuit only indirectly affects the activities of any federal savings association. The high court upheld the previous rulings and allowed the case to go forward.

Our Santa Ana foreclosure defense lawyers are pleased to see this case stay alive. Though the defendants have apparently succeeded in fighting them for four years without reaching the merits, the allegations involved are quite damning for WaMu and possibly its new parent, Chase. Inflating appraisals takes advantage of home buyers who cannot have the same skills and knowledge as the appraiser (except in rare cases) and thus have no idea whether the appraisal is accurate. This is why appraiser independence is so important. After an inflated appraisal, home buyers are essentially cheated out of the difference between the true value and the inflated amount they borrow, locked into extra interest. As Los Angeles County foreclosure defense attorneys, we suspect this kind of wrongdoing, a form of predatory lending, was more pervasive during the real estate bubble than lenders would like us to believe.

If you believe you were the victim of an unfair or predatory home loan, you don't have to put up with it. Call Howard Law, P.C., today for a confidential case evaluation. You can cal 1-800-872-5925 or send us a message online.

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