Nov. 1 (Bloomberg) -- First American Corp., the largest U.S. title insurer, was sued by New York Attorney General Andrew Cuomo for allegedly inflating home values under pressure from Washington Mutual Inc.

First American's eAppraiseIT LLC unit gave in to demands for higher appraisals to secure more of Washington Mutual's business, Cuomo said at a news conference in Manhattan today. A First American spokesman disputed Cuomo's allegation. The appraiser did 262,000 valuations over the past 18 months for Washington Mutual, the biggest U.S. thrift, and earned $50 million, Cuomo said.

``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.''

States including California, Colorado, Ohio, and Connecticut have been investigating the mortgage industry as foreclosures rise nationwide. A borrower who gets a home loan based on an inflated appraisal and falls behind on payments would have difficulty selling or refinancing for enough to pay off the mortgage.

New York is asking the state Supreme Court to force First American to forfeit profits from the allegedly improper appraisals and pay damages.

First American and eAppraiseIT ``signed over their independence to Washington Mutual,'' said Eric Corngold, executive deputy attorney general for economic justice. Cuomo said Seattle- based Washington Mutual is not being sued because of questions over federal jurisdiction.

`Vehemently Disagree'

``We vehemently disagree with his characterization of the facts,'' Kenneth DeGiorgio, First American's general counsel, said in a conference call with analysts. ``We're confident that once we've had the opportunity to set forth our response before an impartial arbiter, our activities will be found to be appropriate.''

Washington Mutual said in a statement that it is suspending its relationship with eAppraiseIT pending further investigation.

``We are surprised and disappointed by the allegations in the complaint,'' Washington Mutual said in the statement. ``We have absolutely no incentive to have appraisers inflate home values.''

Washington Mutual fell $2.13, or 7.6 percent to $25.75 in New York Stock Exchange composite trading. First American gained 40 cents, or 1.3 percent, to $30.50. The company reported earnings today.

`Damning Evidence'

Cuomo, 49, conducted a nine-month investigation and the evidence against First American is ``damning,'' he said. It includes e-mails between executives at the appraisal company and Washington Mutual that show Poway, California-based eAppraiseIT ``willingly violated'' state and federal regulations that call for independent home appraisals.

eAppraiseIT President Anthony Merlo Jr. said in an interview in May that Cuomo had asked the company for information on work the company had done in New York.

``It's a very good thing, what the attorney general is doing,'' Merlo said at the time. Cuomo's office was focused on ``who's exerting the pressure'' on appraisers, he said.

The First American unit does about 50,000 valuations a month nationwide, Merlo said then.

Washington Mutual first contracted with eAppraiseIT in early 2006 and soon became the company's biggest client, according to Cuomo's suit. The appraiser initially used its own staff and third-party contractors. Then, ``WaMu's loan production staff began complaining that the appraisal values provided by eAppraisIT's appraisers were too low,'' the suit said.

`Proven Panel'

In February, WaMu directed eAppraiseIT to stop using its own appraisers and substitute a ``proven panel'' selected by the loan origination staff, the suit said.

The lawsuit quoted e-mails from eAppraiseIT executives, including an internal note on April 17 that cited ``the legal concern about collusion.''

``I think it will tarnish our reputation in the appraisal community because we are allowing WaMu to pick appraisers based on their loan officers,'' the eAppraiseIT executive wrote, according to Cuomo's lawsuit.

In March, Cuomo said he was investigating the subprime mortgage market in response to the surge in delinquencies. In May, he subpoenaed real estate appraisers Mitchell, Maxwell & Jackson Inc. and eAppraiseIT, as well as the broker Manhattan Mortgage Co.

Subpoenaed Companies

Within a month, Cuomo subpoenaed records from Vanderbilt Appraisal Co. LLC, which is owned Terra Holdings, a real estate company whose principals include New York developers Arthur and William Lie Zeckendorf.

In September, credit rating companies Standard & Poor's and Fitch Ratings said they were subpoenaed by Cuomo. Fitch said its subpoena demanded information on residential mortgage-backed securities and collateralized-debt obligations, which hold mortgage-backed securities.

Cuomo, who took office in January, has also broadened an investigation begun by his predecessor, Eliot Spitzer, into the $85 billion student loan industry. The probe first focused on conflicts of interest between lenders and schools. A dozen lenders and 26 colleges and universities reached agreements with Cuomo to cut financial ties and abide by a code of conduct.

To contact the reporters on this story: Sharon L. Crenson in New York at screnson@bloomberg.net; Karen Freifeld in New York at kfreifeld@bloomberg.net.

Last Updated: November 1, 2007 16:49 EDT