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Were the Banks Complicit in the Mortgage Fraud?

November 7, 2007 by Lucas Lechuga

Washington Mutual

Shares of Washington Mutual tumbled a little over 17 percent today as a result of a probe initiated by New York Attorney General Andrew Cuomo. Subpoenas were issued today by Cuomo to Fannie Mae and Freddie Mac, two large government-sponsored mortgage investors, to investigate mortgages that they purchased from Washington Mutual. Cuomo alleged that Washington Mutual pressured a major real estate company to inflate home appraisals. The New York Attorney General stated, “Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender’s interest. Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals.”

This puts a whole new spin on the mortgage fraud fiasco. Everyone has been saying for months that banks were unaware that they were being defrauded. The wool was pulled over their heads, so to speak. This may not have been the case after all. In fact, they may have been pulling the wool over someone else’s head and running them into a wall. Ouch!

If these allegations turn out to be true then Washington Mutual will be in a world of pain. Fannie Mae and Freddie Mac will no longer buy their mortgage loans which will leave Washington Mutual with no other choice but to leave these loans on their books. Not a good scenario.

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3 Comments on "Were the Banks Complicit in the Mortgage Fraud?"

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To be fair, secondary marketing and higher probably did not know they were being defrauded until it was already getting too late to do anything about it, but certainly the account executives pushing these deals through knew they were fraudulent and either had a underwriter who was an idiot or who was an accomplice. As a former account executive, I was not above massaging a deal to meet guidelines or finding loopholes to get them through that in these days of stricter guidelines might be considered fraudulent. I have seen both types of underwriters, though to be fair the underwriters… Read more »
The thing is, during the boom when prices really were going up at double-digit rates every year, many of the comps that appraisers could use at any given time were already outdated and didn’t reflect true market value at the time of purchase. One townhome subdivision near me (north Palm Beach County) went up 50% in value in less than 6 months. I mean, a property’s true value is the amount of money someone is willing to pay for it. So, getting an appraisal to fall in line with the contract price isn’t way off-base, if you ask me. The… Read more »
Alejandro Diaz

I see a lot more of this in the near future, I see Goldman Sachs releasing more losses from defaulted loans sometime before the end of the year…

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