FDIC seal photo by Ryan McFarland
FDIC files suit
The Federal Deposit Insurance Corporation (FDIC) has filed a lawsuit accusing Lender Processing Services Inc. (LPS) of negligence and breaches of contract for which they are demanding a jury trial to recoup $154.5 million in losses on behalf of Washington Mutual Bank (WaMu) of which they are now the receiver.
Fox News describes LPS as a company that “helps mortgage servicers manage home loans and has come under fire for the various problems plaguing mortgage servicers, including cases of false affidavits known as robo-signing.”
WaMu falls, FDIC takes over, now filing lawsuits
In the largest bank failure in American history, WaMu was seized by the FDIC in 2008 which facilitated its sale to JP Morgan Chase. The FDIC maintains receivership of WaMu and has filed a lawsuit demanding a jury trial against LPS, seeking to recover $154,519,071.10.
The FDIC alleges that WaMu suffered this loss “as a direct and proximate result of gross negligence” and repeated breaches of contract.
The lawsuit alleges that WaMu hired LPS subsidiary LSI Appraisal, LLC (LSI) in July 2006 as its appraisal branch, wherein LSI agreed it would “conform to federal and state law, regulatory guidelines and all applicable industry standards, specifically including the Uniform Standards of Professional Appraisal Practice (‘USPAP’)” and that LPI would serve as the “gatekeeper” regarding appraisal services provided and would “insure the competency and qualifications of its appraisers, to conduct meaningful quality control review of the appraisals and to police WaMu’s loan staff and act as an intermediary” between WaMu originators and LSI appraisers. The agreement also required LSI to report any “inappropriate contacts or requests’ by WaMu employees regarding appraisals.
LPS allegedly used unqualified appraisers
The lawsuit further notes that despite the terms outlined above, “at least 220 of the appraisal services LSI provided failed to comply with federal and state law, regulatory guidelines, and USPAP.
Further, the FDIC alleges that LSI “used appraisers who lacked the skill, experience and qualifications necessary to perform the appraisals requested” and that their “quality conrol of the appraisals” was “severely inadequate.”
Bottom line of the allegations
The crux of the allegations is that because the appraisals provided to WaMu were so negligent and “contained substantially inflated appraised values” and subsequently “WaMu would not have made the residential mortgage loans at issue and would not have suffered losses on those loans.”
Why was LPS and Fidelity named in the suit?
LSI and LPS were named alongside Fidelity National Information Services, Inc., LPS Property Tax Solutions, Inc. (fka Fidelity National Tax Services), LSI Title Company and LSI Title Agency, Inc.
“The other named Defendants controlled and directed the actions of LSI” therefore, the lawsuit states that they are “directly liable for the damages resulting from the grossly negligent appraisal services provided by LSI.”
LPS responds to allegations
“LPS contends that the services LSI provided satisfied the terms and conditions of its contract with WAMU and were not performed with gross negligence,” the company said in a recent SEC filing. They also note they believe “that any loan losses are not because of appraisal issues, but are due to the quality of underwriting by WAMU, borrowers defaulting and the weakness of the economy after the loans were made, among other factors.”
Some people note that appraisals don’t make a loan good or bad rather simply satisfy a regulatory requirement. LPS spokeswoman Michelle Kersch has stated, “LPS intends to aggressively defend itself against these allegations.”
Joyce Cauthen
August 28, 2011 at 12:04 pm
Well, I do believe that it is absurd that the FDIC is suing for damages to Wamu. Wow!!! In my day, regardless of whether the appraisal was done inhouse, out sourced or in any other manner, it was subject to quality control within the WAmu entity itself. This way Wamu would have had the opportunity to perform due diligence of appraisals no matter who performed them, thus, limiting liability to Wamu and secondly, stopping the practice before it got to the extreme. This is ridiculous.
What is missing out of the equation is:
The internal auditors, state auditors, federal auditors, fannie and freddie auditors and the several due diligence divisions such as the internal one at wamu which is a regulatory requirement by the OTC and the FDIC. The regulatory was not minding the store nor were those at Wamu – FDIC needs to step up to the bench and admit that it did not or if it did, when it did, audit the loans on a regular and consistent basis. Even so, if Fannie and Freddie purchased any of those loans, they too, had in place a due diligence division which would have brought this pratice to light. Now, should the LSI pay for some damages, yes, but should the auditors of Wamu, FDIC, OTC and Fannie and Freddie get a pass – certainly not. What I believe was intentional was the practice of these lenders outsourcing such items as appraisals (critical to loan approval) and passing the liability to another entity such as LSI because these entities knew or should have known what was going on. There will be no way to convince anyone in the business that LSA was allowed to get away with this on their own. I hate that, I really do because we need good regulatory, auditing systems and due diligence and it was removed from the spotlight back in 1998 when deregulation came into play. I was not against deregulation, but I was against what the unintended consequences would be of deregulation and friends, this is just one of the places where it made itself known.
Fannie and Freddie were masters in 1984 through 1990 and the best of the best and never would have allowed this kind of practice to take place. Most people do not realize it, but Fannie and Freddie were the main stay of the mortgage industry and when they began to go along with the rest of the lenders and their violations, etc., this eliminated the one source the industry had for providing affordable home loans to people who could afford to pay and who did not have to resort to the fraud that is now rampant in the industry.
Joyce Cauthen
August 28, 2011 at 12:31 pm
And another note of interest, how is it possible that the LPS spokesman could make a statement that the "appraisals" don't make a good loan or a bad loan. Here again, if that loan goes south and it was given a higher value than what it should have had, the lender and the homeowner are going to get hit twice as hard. While it is a regulatory requirement to order an appraisal, the appraisal value must be as solid as it can be and the terms of the loan with regard to LTV are a critical factor in determing LTV, is it not?