Bad press for WAMU

The front page headline of Friday's P-I (11/2/7 - sorry, no link available) reads, "WaMu faulted on home loans." In the second paragraph of the story, the writer admits, "The suit filed ... doesn't name Seattle-based WaMu as a defendant." I guess they knew that the WaMu name would grab local attention. Whatever involvement WaMu does or doesn't have, the concern over inflated appraiser evaluations is a legitimate one.

When a typical potential buyer makes an offer on a home, it is usually conditioned upon their ability to obtain a home loan for the purchase price. In order to approve the loan, the buyer's lender requires an appraisal of value equal to or greater than the amount of the loan. This provides the lending institution with assurance that it can recoup the amount of the loan if the buyer should default. If the appraised value of the home is less than the price a buyer has offered, they are unlikely to get the loan and would have to find another source of funding, or reduce or rescind their offer.

Problems arise if the appraiser feels pressured to deliver an unrealistically high appraisal (estimate of value). This can happen if the institution paying the appraiser's fee benefits from an artificially high result. In the short run, the buyer might seem to benefit by getting their loan approved, but in the long run it causes the buyer to overpay for the home and the loan.

It will be interesting to see whether this story marks the tip of the iceberg or disappears in the mist.