Yesterday I wrote WaMu Collapses Under Appraisal Probe.

My conclusion was "Add Washington Mutual (WM) to the list of companies fighting for its financial life. If Washington Mutual has to buy back those loans from Fannie Mae (FNM), the patient will die. It's as simple as that."

Today I am thinking about the implications of this from an appraisal and other standpoints. Following are a few more updates.

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Washington Mutual Inc., the largest U.S. savings and loan, fell the most in 20 years after New York Attorney General Andrew Cuomo said he found a "pattern of collusion" on mortgage appraisals linked to the company. "Our belief is the appraisal in many cases was fraudulent, that there was pressure on the appraisers."

Mortgage brokers are typically paid when they close a loan, and the "temptation to cheat is overwhelming" when home prices fall, Wakefield said. "The fact that Washington Mutual and every other lender allow this conflict to take place within their organization is something they need to take responsibility for," he said. "If this turns up an indication of rampant inflated valuations, it's going to be a problem."

This is not "going to be a problem." This "is a problem."

I still have to sit back and shake my head, wondering how anyone could not have seen this coming. But that did not stop the CEO from saying "The slowdown was more severe than either we or the industry anticipated."

I keep struggling with how to access the weight between greed and stupidity. There's certainly enough of both to go around.

Meanwhile WaMu credit default swaps hit a five year high, rising over 50% on Tuesday, to 385 basis points.

The AP is writing Uncertain Future Sinks WaMu Shares. Here is the key paragraph:

"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," Cuomo said. "Knowing this, 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."

Fannie Mae (FNM) and Freddie Mac (FRE) now have to hire an independent appraisal to verify what WaMu's appraisers say. This is going to do two things:
 

• Increase Costs
• Put Downward Pressure On Appraisals

Cuomo's Press Release

Following are snips from Cuomo's Press Release:

“The integrity of our mortgage system depends on independent appraisers,” said Cuomo. “Washington Mutual compromised the fairness of this system by illegally pressuring appraisers to provide inflated values."

E-mails also show that executives at First American and eAppraiseIT knew their behavior was illegal, but intentionally broke the law to secure future business with Washington Mutual.

"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.”

Raise Dividends?

Dividend speculation Is silliness:

Kerry Killinger, Washington Mutual's chief executive, refused to speculate on whether the company's board of directors would raise dividend rates. He pointed to a lack of visibility over market conditions, liquidity issues and even earnings.

"We don't always have great certainty around the future," Killinger said during the daylong conference. "We just don't know how long this level of lower performance will remain."

Also included in the above article was this quote:

'Washington Mutual is going to have to be able to quantify their exposure to credit losses. If they can't do that, then that puts the dividend in much greater jeopardy.'
— Roger Nusbaum, Your Source Financial

Not that it can't happen (in light of what we have seen already) but WaMu would be nuts to do anything other than decrease dividends.


Financial Lives On The Line

We are seeing some major companies fight for their financial lives here:
 

• Washington Mutual: See WaMu Collapses Under Appraisal Probe.
• Citigroup (C): See Citigroup Fighting For Its Financial Life.
• Ambac (ABK) and MBIA (MBI): See Downward Spiral of Deep Junk and Any Credibility Left At Fitch?

In response, institutions are going to be far more cautious going forward. This applies to both lending and appraisals. The result is a further slowdown across the board in all lending, not just housing. In spite of this, few see the recession coming that we are already in.