Shares of government sponsored mortgage lenders Fannie Mae and Freddie Mac tumbled Wednesday after receiving subpoenas from New York Attorney General Andrew Cuomo seeking information on loans they bought from Washington Mutual and other banks. Cuomo said he uncovered a "pattern of collusion" between lenders and appraisers, and is seeking documents that may prove the lenders inflated appraisal values. The subpoenas also seek information on Fannie and Freddie's due diligence practices. Both have said they will cooperate with the investigation. They also said they will appoint an independent examiner. If decided that they own or guarantee mortgages with inflated appraisals, company policy dictates that the lenders buy back the loans. Last week Cuomo sued the appraisal unit of First American Corp., the number-one U.S. title insurer, for inflating home values after pressure from WaMu. "In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals," Cuomo said. WaMu is Fannie Mae's third-largest loan provider, selling it $24.7B in 2007, and Freddie Mac's fourtheenth largest at $7.8B in 2007.
"I wish I could say I am shocked by the discoveries made by the Attorney General and his staff. Sadly, what allegedly happened between First American and Washington Mutual is not an isolated incident. Rather, it is symbolic of a problem that has plagued the appraisal industry for years," said Terry Dunkin, President of the Appraisal Institute. "As the allegations against First American show, the mortgage industry’s dirty secret has been that banks exert tremendous pressure to extort appraisers."
Separately Washington Mutual said Wednesday it expects the housing slump to continue through 2008, causing mortgage lending to fall to their lowest levels in a decade. WaMu sees mortgage lending falling to $1.8 trillion in 2008, down drastically from an estimated $2.3-2.4 trillion in 2007. "The soft landing we were anticipating quickly transitioned to a severe downturn," said CEO Kerry Killinger. "This process is painful." The bank predicts home prices in California, Arizona, Florida and Nevada will deal with "above-average pressure" through 2008. Killinger noted that his company has "contained" the risks by halting riskier home loans, but refused to comment on whether WaMu will lower its dividend, which now yields close to 10%. Shares of WaMu are down about 55% for the year.
In midday trading, WaMu shares are down 16.5%, Fannie Mae shares are down 11.4%, and Freddie Mac shares are down 8.5%.
Commentary: Expecting a Short Squeeze in Financials • How WaMu's Lawsuit Affects Countrywide Financial
Stocks to watch: WM, FNM, FRE. Competitors: CFC, WFC, BAC.ETFs: PJB, KBE
Earnings call transcript: Washington Mutual, Inc. Q3 2007 , Freddie Mac Q2 2007, Fannie Mae Q4 2006
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