Senate Panel Report on WaMu Failure Highlights Appraisal Role

[Ed. - This is a post from AI Forum, submitted (with his commentary in blue) by Michael R. Cartwright, CMA, RPG, C/QP.]

My goodness, what a misleading headline that is after perusing this 'news' item.

"The U.S. Senate Permanent Subcommittee on Investigations released a 650-page report April 13 that included a case study on Washington Mutual’s failure, highlighting the role of unsound appraisal practices (not exactly) in the bank’s collapse.

The report chastised the Office of Thrift Supervision for failing to force WaMu to come into line with its appraisal practices, many of which were inflating home values and leading to risky lending practices. From 2004 to 2006, for example, while WaMu was conducting its own appraisals in house, OTS persistently chastised the lender for allowing sellers to estimate the value of their properties and directed WaMu to stop allowing an Owner’s Estimate of Value to be included in documents sent to appraisers. However, WaMu did not address the issue until the end of 2005.

OTS also concluded that WaMu’s use of automated appraisal software failed to comply “with standard appraisal practices” and showed “highly questionable value conclusions.” Yet WaMu continued using automated software until the end of 2006 before OTS took any enforcement action against the lender, the subcommittee report said. (Again, not exactly, since under FIRREA those AVM programs actually are not appraisals but 'estimations', if I recall correctly)

In an effort to address the issue, WaMu began outsourcing its appraisal functions to two vendors, EAppraiseIT and Lender Service Inc., and reduced its in-house appraisal staff from 400 to 30, while the two new vendors began conducting appraisals on homes purchased with WaMu financing, according to the report.

At the same time, WaMu assigned oversight of the outside appraisals to its newly developed in-house Appraisal Business Oversight group. An OTS appraisal expert advised the Senate subcommittee he saw no evidence to suggest WaMu could not handle a large appraisal outsourcing project, and WaMu management said it felt it had full approval from OTS for outsourcing.

However, WaMu faced even more problems once outsourcing began, according to the subcommittee report. After an OTS appraisal expert reviewed 225 loan files, he found several instances where home values had been inflated without documentation to support the increased value. OTS also discovered WaMu had failed to comply with appraisal independence procedures after outsourcing appraisal functions and that they (WAMU?) were also not in compliance with the Uniform Standards of Professional Appraisal Practice (However, USPAP does not apply to the lenders and their agents, only to appraisers!).

OTS was sluggish in taking enforcement actions against WaMu ('non-existent' would be a more correct word and that applied equally to each and every single lender that the federal government was supposedly regulating!), according to the report. OTS prepared a draft cease and desist order to stop the lender from making any further appraisal regulations violations, but the order did not come before the bank collapsed and was sold in October 2008.

Source: http://www.appraisalinstitute.org/ano/newsletter/DisplayNwsLtrArticle.aspx?volume=12&numbr=7/8&id=14029

OK, boys and girls, lets have a round of applause for yet another failure by all of the regulatory agencies to even begin to try to perform the tasks they were mandated to do.


Michael R. Cartwright, CMA, RPG, C/QP
Mineral Business Appraisal
[Solid Mineral Property Appraisal and Mining Business Valuation]