Washington Mutual's mortgage woes come as no surprise to Graham Albertini, a real-estate appraiser who worked at WaMu's Bellevue office...

Washington Mutual’s mortgage woes come as no surprise to Graham Albertini, a real-estate appraiser who worked at WaMu’s Bellevue office when its mortgage business was going gangbusters.

Over eight years, Albertini said, he watched the bank trade safety for speed in its home-lending operations. The trade-off, he said, eroded fundamental safeguards put in place to protect WaMu from lending more against homes than they were worth.

When Albertini began working for WaMu in 1999, most mortgages were supported by a complete appraisal, which included an on-site property inspection, detailed measurements of the house and a physical drive-by of comparable homes by bank appraisers to determine if the house was worth what the buyer was willing to pay for it.

Every appraisal was given a cursory review, while pricier homes and houses with unusual features or circumstances were given an even closer review by a second certified appraiser. If everything checked out, the loan was sent to the bank’s underwriting department for completion.

“Up until 2001, it was a pretty good system. Every appraisal was looked at by a human being,” said Albertini, who now works for American Home Appraisals on Mercer Island.

But as loan volume increased, so did the pressures — and the incentives — for WaMu appraisers to work faster and bypass safeguards that could have protected the bank against the high-risk mortgages now dragging it down, Albertini and other appraisers say.

“It’s the elimination of oversight in pursuit of profit. … That’s a formula for a breakdown,” said appraiser Richard Hagar, who works with Albertini and regularly trains other colleagues and law-enforcement fraud investigators on appraisal standards.

WaMu did not respond to several requests for comment. It recently announced it would lay off up to 3,000 employees, cut shareholder dividends and shutter its free-standing home-loan operations. In the latest four quarters it has set aside about $6.4 billion to cover loan losses, and financial analysts say the bank could lose up to $16 billion more.

Priority: Closing the deal

Albertini and Hagar said key safeguards were compromised when the bank began a sweeping effort to capture a larger share of the mortgage market starting in 2001.

First came automation, which allowed the bank to replace the first set of eyeballs evaluating the appraiser’s work — the cursory review by administrative staff — with a type of computer review that was becoming increasingly common in the industry.

Michael Evans, international treasurer with the American Society of Appraisers, said some lenders eventually began using computers alone to establish home values. Others used them conservatively, as an additional tool for their appraisal staff, recognizing that “speed can kill,” he said.

At WaMu, field appraisers quickly learned that by stating that a house was being sold “as is” and listing its market value as greater than the requested loan amount, they could bypass a more in-depth review of their work and get paid more quickly, Albertini said.

The computer system also had glitches that obliterated appraiser comments about conditions that might affect the value of the property, things such as proximity to railroad tracks or unfinished remodeling. The glitches happened often enough, he said, that Albertini stopped working off the computer reports and instead asked appraisers to just send him copies of their original paperwork.

In 2003, the bank instituted a new commission system that paid field appraisers according to the volume of their work.

Then, in 2005, WaMu expanded assignments for its local reviewers, Albertini said. Instead of just checking the work of field appraisers on the Eastside, the reviewers began to conduct limited Internet reviews on appraisals done in Idaho, Utah, Alaska and New Mexico — markets the reviewers didn’t know well, if at all.

By then, lenders such as WaMu had shifted away from simply collecting interest on loans they held. Their new business model was to collect fees for making the loans and resell many of the mortgages on Wall Street, where investors snapped them up as mortgage-backed securities.

To meet investor demand, banks including WaMu began acquiring more of their loans through independent mortgage brokers, paying a commission for each loan the broker arranged. The broker, in turn, selected the appraiser to determine if the house was worth the amount of the loan.

The entire home-financing system, Albertini and Hagar said, was geared toward closing the deal, and appraisers who were willing to play along could make a lot of money.

Those who didn’t want to play complained loudly to federal banking regulators through professional organizations. By the thousands, they also posted their names on an Internet petition, warning as early as 2001 that undue pressure from aggressive brokers and lenders to bend the rules was endangering the nation’s banking system and the economy.

In 2006, federal regulators said they wanted lenders to use appraisers who had no financial interest in the loan. WaMu laid off its appraisers, including Albertini, and hired an outside company to arrange the appraisals.

New York Attorney General Andrew Cuomo alleged in a suit late last year that WaMu corrupted that relationship and used the promise of more business to handpick favored appraisers who would sign off on inflated property values tied to WaMu loans.

The company sued by Cuomo, e-AppraiseIT, has denied any wrongdoing. So has WaMu, which is not a target of the suit.

Similar allegations surfaced again in February when a Sacramento, Calif., appraiser sued the bank, alleging that WaMu and its surrogates stopped using her services because she “refused to compromise her integrity, independence, and refused to violate the laws and include false and deceptive facts about existing market conditions.”

The company denied the charge. The suit is pending.

Stupidity or duplicity?

WaMu’s internal controls in overseeing loans also have been questioned.

In Washington state, a residential appraiser in Pacific County filed a complaint with the state Department of Licensing after determining that a home appraisal performed for WaMu had been inflated by at least $80,000.

Appraiser Elizabeth M. Stevens said WaMu hired her in November 2007 to review the work of another appraiser, who had valued a property for a couple looking to refinance their house. The first appraiser had been from an appraisal-management company under contract with WaMu.

During her review, Stevens discovered that the homeowners had tried selling the home for at least three months. When it didn’t sell, they applied to refinance it for an amount higher than what they tried to sell it for.

“My opinion was the original appraisal was a piece of garbage,” Stevens said. “If the property wouldn’t sell at $200,000, why would it sell at $300,000?”

Stevens said she notified WaMu of her concerns and findings, essentially reporting that the owners were asking to borrow a lot more than the house was worth.

“They [WaMu] can come back and ask questions. In this case, they didn’t,” Stevens said recently. “I just received notice that WaMu ignored my review and loaned on the amount of the original appraisal.”

She declined to provide the property address to The Seattle Times, citing confidentiality concerns, but said she reported it to the licensing department in her complaint against the appraiser.

Stevens said it was impossible to know whether the original appraisal was the result of error or fraud.

“Where does the line fall between someone being stupid and someone deliberately going out of their way to inflate a value to keep a certain client’s business?”

Susan Kelleher: 206-464-25508 or skelleher@seattletimes.com