Washington Mutual was accused of pressuring home appraisers to provide inflated values. Now New York Attorney General Andrew Cuomo is expanding the investigation to include Fannie Mae and Freddie Mac, who purchased or guaranteed many of these loans.
According to Brian Faith of Fannie Mae, “if the examiner determines we own or guarantee mortgages with inflated appraisals, our guide states that the lender must buy back the loans that do not meet our standards and requirements.” This would open Washington Mutual to tremendous liabilities from homeowner defaults.
Not only would Washington Mutual have to buy back many of these loans, they would have to manage it through the credit crunch that has hit mortgage markets. It would indeed be more difficult for Washington Mutual to find buyers for these mortgages. Washington Mutual would not have the reserves to add all of these loans to their books.
It is an interesting twist of fate for Washington Mutual. Years ago, Providian found itself in trouble by overextending itself by offering too much credit to consumers with poor credit histories. Washington Mutual bought most of those accounts to build its credit card business and to market its financial services to cardholders.
Now Washington Mutual finds itself in a similar position, only this time it is in the mortgage industry that they are facing an uphill battle. Fortunately for WaMu, they have other profitable segments of their business that can offset some of these mortgage losses. If that will be enough, only time will tell.
Meanwhile, Wall Street investors are watching Washington Mutual carefully for further signs of trouble. On Wednesday, the WaMu (WM) stock price fell $4.19 to $20.04. This 17% drop may be just the beginning. Fannie Mae and Freddie Mac also experienced heavy selling on Wednesday.
Throughout the mortgage crisis, there is one undeniable fact. There are other lenders that may have allowed or even pressured appraisers to inflate home values. Subsequent investigations of other lenders are likely.
