NY AG Sues First American, Unit in Mortgage Probe

By Paritosh Bansal and Martha Graybow

NEW YORK (Reuters) - New York Attorney General Andrew Cuomo on Thursday sued First American Corp (FAF.N: Quote, Profile, Research, Stock Buzz) and one of its units for allegedly colluding with Washington Mutual Inc (WM.N: Quote, Profile, Research, Stock Buzz) to inflate the appraisal values of homes, helping trigger the mortgage market meltdown.

The lawsuit is the first major development in Cuomo's ongoing, nine-month probe into the mortgage industry. The attorney general's office has sent hundreds of subpoenas and has uncovered "fundamental flaws" in two areas of the market -- appraisals and securitization of mortgage loans, officials said.

The lawsuit, filed in New York Supreme Court, contends that First American and its real estate appraisal subsidiary eAppraiseIT violated appraiser independence laws.

Washington Mutual, the largest U.S. savings and loan, was not named as a defendant in the case.

eAppraiseIT, known as EA, "caved to pressure" from Washington Mutual to use a list of preferred appraisers who provided inflated home appraisals, the attorney general's office said.

By using preferred appraisers, "First American helped set the current mortgage crisis in motion," Cuomo said in a statement.

"The independence of the appraiser is essential to maintaining the integrity of the mortgage industry," Cuomo said. "First American and eAppraiseIT violated that independence when Washington Mutual strong-armed them into a system designed to rip off homeowners and investors alike."

In a statement, Washington Mutual said it was "surprised and disappointed" by the allegations and was suspending its relationship with eAppraiseIT until it could investigate the situation further.