Skip to main content

Federal regulators are looking into Washington Mutual's (WM) involvement in a scandal involving inflated home appraisals on mortgages originated and then sold to investors in the form of securities.

The Seattle-based lender acknowledged the

Securities and Exchange Commission

's informal inquiry in a statement. The nascent probe is looking at several possible issues, including whether the bank properly disclosed to investors of mortgage-backed securities how loans were appraised, in addition to whether WaMu properly accounted for the loans when disclosing financial results to shareholders, according to the

Wall Street Journal

, citing people familiar with the matter.

The alleged appraisal scandal began nearly two months ago, when New York Attorney General Andrew Cuomo sued title insurer

First American


, alleging that its eAppraiseIT subsidiary had conspired to inflate house-price appraisals in an effort to boost fees. It claimed that one of eAppraiseIT's largest clients was WaMu.

WaMu said in its emailed statement it is fully cooperating with the SEC's inquiry, as well as the Office of Thrift Supervision, the bank's federal regulator.

"After spending a month and a half investigating these allegations, we can say with confidence that there has been no systematic effort by WaMu to inflate home appraisals," a spokeswoman wrote. "We take these allegations very seriously."

The suit by Cuomo's office says First American "caved to pressure" from WaMu to use a list of appraisers who inflated the values of thousands of homes. Cuomo's suit alleged that executives at eAppraiseIT "knew their behavior was illegal, but intentionally broke the law to secure future business with WaMu."

Cuomo's office has also subpoenaed two big government sponsored-enterprises,

Fannie Mae

( FNM) and

Freddie Mac

( FRE) -- two of the largest mortgage investors -- over certain mortgages they have bought from WaMu.

The scandal has been another black eye for WaMu, which has been

hit hard by the drastic downturn of the mortgage industry and overall credit crunch. The consumer-centric company, with a strong hand in retail banking, was forced to slash its dividend by 73% and raise more than $2.5 billion through a convertible preferred stock sale to boost its capital. The capital raising, announced early last week, came in conjunction with WaMu's decision to restructure its home loans unit by cutting more than 3,000 jobs and exiting the subprime lending business altogether.

WaMu said last month that it had suspended its business with the First American unit.

The SEC declined to comment, while a spokesman from the OTS would "neither confirm nor deny" the inquiry.

Shares of WaMu slipped 3.3% to $14.19.