New York Attorney General Andrew Cuomo has reportedly subpoenaed Wall Street firms that securitized risky mortgages during the housing boom, as part of an ongoing investigation of lending practices.

Cuomo’s office has issued subpoenas to Merrill Lynch & Co, Bear Stearns, Deutsche Bank AG and other firms involved in packaging mortgage loans into securities for sale to investors, Reuters reports, citing a Wall Street Journal story that quoted unnamed sources.

The New York attorney general’s office has been conducting a ten-month investigation of the mortgage industry, which is focused on appraisals and the packaging of loans into mortgage-backed securities (MBS) for sale to investors.

On Nov. 1, Cuomo’s office announced a lawsuit against First American Corp. and its subsidiary eAppraiseIT, accusing the companies of providing inflated property appraisals at the behest of Washington Mutual. The lawsuit claims the companies bowed to pressure from WaMu to use a list of preferred appraisers, who allegedly provided inflated property appraisals (see Inman News story).

WaMu was not named in the lawsuit, and all the companies involved have denied wrongdoing.

Cuomo had previously disclosed that his office had subpoenaed unnamed investment banks regarding mortgage loans sold to them by WaMu. The loans were later packaged as mortgage-backed securities (MBS) and sold to investors.

On Nov. 7, Cuomo announced that he had also subpoenaed government-chartered mortgage repurchasers Fannie Mae and Freddie Mac as part of the probe. That action was criticized by James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, the regulator that oversees Fannie and Freddie.

Lockhart said that unlike private issuers of mortgage-backed securities, Fannie and Freddie “retain the credit risk on the underlying mortgages by guaranteeing repayment to MBS holders,” and therefore “have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals.”

On Nov. 26, First American asked a U.S. District Court in Manhattan to dismiss Cuomo’s suit, claiming states are barred from enforcing laws governing federal savings and loans. The New York Attorney General’s lawsuit was filed in the Supreme Court of New York, New York County.

In a statement, Cuomo’s office called the motion by First American’s attorneys meritless, characterizing it as part of the company’s “vain attempts to raise procedural roadblocks.”

First American and its subsidiary eAppraiseIT “colluded with Washington Mutual to inflate the appraisal values of tens of thousands of homes,” in New York, the statement alleged. Cuomo intends to “continue to fight appraisal fraud and mortgage fraud on behalf of New York consumers,” a spokesman said.

***

What’s your opinion? Send your Letter to the Editor to matt@inman.com.

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