Appraisal Scoop

What Should the Good Appraiser Do When the FBI or Any Law Enforcement Officer Calls?

The FBI is on the Phone for You
By Peter Christensen

The FBI released a report earlier this year entitled 2008 Mortgage Fraud Report "Year in Review". It indicated the obvious: that reports of mortgage fraud and investigations of it by the FBI increased significantly in 2008. The FBI further indicated:

"With the anticipated continued upsurge in mortgage fraud cases, the FBI has created the National Mortgage Fraud Team (NMFT); fostered new and existing liaison partnerships within the mortgage industry and law enforcement; and developed new and innovative methods to detect and combat mortgage fraud.

In December 2008, the FBI established the NMFT to assist field offices in addressing the financial crisis, from the mortgage fraud problem and loan origination scams to the secondary markets and securitization. The NMFT provides tools to identify the most egregious mortgage fraud perpetrators, prioritizes investigative efforts, and provides information to evaluate resource needs."

One result of the FBI's intensified effort seems to be that appraisers have been getting more calls than usual from FBI special agents wanting to ask questions about particular reports. The agents almost never indicate specifically what they are investigating (other than "fraud"), who initiated the investigation, or who is the direct subject of the investigation. Often, the agents try to be friendly and say something like: "I'm looking at your report here and I'm just wondering if you can tell me a bit about how you arrived at your value" or "I have a review of your appraisal that has a much lower value, can you help me understand why?" Sometimes, the agents suggest that giving them some information will help them close up the file and not have to bother the appraiser again. The agents will then often also ask the appraiser to come down for an interview or tell the appraiser they'd like to come by and have a look at the file.

I have no doubt that there are some appraisers spread across the country who actually may have crossed the line and may have some culpability for engaging in intentional fraud. My post here is not for those appraisers. The typical situation I see, however, is much more innocent.

The appraiser receiving the agent's call is more typically scratching his head trying to figure out why the FBI would be interested in the subject report. It usually seems like the report under scrutiny is no different than any other assignment, except maybe there's been a subsequent foreclosure on the property. And, I do think that in most of these cases when an FBI agent is inquiring about an appraiser's report, there is likely nothing wrong with the report itself. In fact, I've recently seen inquiries from the FBI and other state and federal investigative agencies that seemed to be based on nothing more than a lender having a foreclosed mortgage and a low-ball retrospective appraisal in the file.

What should the good appraiser do when the FBI or any law enforcement officer calls?

• First, of course, you need to be friendly and polite. The last thing you want to do is give the impression that you're hiding something by being short or difficult.
• Second, try to determine if the appraisal report that the agent or officer has in front of him really is your work. We've seen cases were law enforcement launched investigations without any idea that the report in their hands obtained from the lender had been altered or forged. Thus, without discussing the results in your report, try to ask the agent or officer to tell you information from the report in front of him.
• Third, if the agent or officer wants to talk about the specifics of the report, you need to realize that your USPAP ethics duty of confidentiality to your client prevents you from doing so, unless you've received a subpoena (or court order) or have been authorized by your client. (If the investigator is with your state licensing or enforcement agency, the duty of confidentiality, however, does not prevent you from discussing or providing the report.) Thus, you'll need to politely advise the agent or officer that you have that duty to your client and that you cannot violate it by talking about the assignment or results.
• The same thing goes for complying with a request (as opposed to a subpoena) for your work file. Use this as an opportunity to politely and professionally break off the discussion and then consult with an attorney.

Even when a law enforcement investigation is not covered by insurance, your E&O provider should be able to provide a reference to a knowledgeable and economical attorney with whom you can discuss the situation.

Source: Appraisal Legal Defense and Insurance Blog by Peter Christensen and Robert Wiley - Legal issues and insurance matters affecting residential and commercial real estate appraisers

Lloyd's of London filed a lawsuit against appraiser for misleading the company on his application for E&O coverage

According to the story by Courtenay Edelhart, Californian staff writer, Insurer suing Bakersfield appraiser. 

"Lloyd's of London filed a lawsuit against Newton, owner of San Joaquin Appraisals Inc., on June 16 alleging he misled the company on his application for errors and omissions coverage. The lawsuit seeks permission to rescind the policy, which it said was granted under false pretenses."

"Jerome N. Lerch, attorney for Lloyd's of London, did not return calls Tuesday seeking comment."

"There's more than an insurance policy at stake. If Lloyd's loses, it could be on the hook for millions of dollars because a defunct subprime lender is suing Newton and others over several appraisals done for Crisp, Cole & Associates, a now closed real estate company the FBI is investigating for mortgage fraud."

AMC Appraiser Agreements & Indemnity - TSI Appraisal Services Appraiser Agreement Reviewed

        AMC Appraiser Agreements and Indemnity - By Peter Christensen

We are receiving many calls from our insured appraisers about AMC agreements. Many of our calls in the last fews days have concerned the TSI Appraisal Services Appraiser Agreement. This agreement is worth looking at because, though more extreme than others in its one-sided wording, it illustrates the typical legal problems for appraisers found in AMC agreements.

With regard to the TSI agreement, appraisers are particularly concerned about the indemnity section. Indemnity provisions are a recurring issue with AMC agreements. The bottom line is they are usually an AMC's attempt to shift potential liability by contract from the AMC to the appraiser. Because of the current mortgage crisis, this attempted shifting of liability is occurring more than ever.

Section 7 of the TSI agreement is entitled "General Indemnity." From our insurance and legal defense perspective, the main problems we see in this section (and in various other AMC agreements) are:

1. Indemnity Provision. The first paragraph of section 7 requires, in part, that the appraiser:

"indemnify, defend, save and hold harmless [TSI] from and against any and all liability, claims, damages, penalties, losses, fines, judgments . . . [and] any other costs, fees and expenses . . . in any way related to . . . [among other things] any appraisal report submitted to [TSI] by Appraiser pursuant to this Agreement."

Simply construed, this means the appraiser is promising to pay TSI for any cost or loss of any kind (including criminal or civil fines ordered against TSI) for anything related to an appraisal submitted by that appraiser. This is an unusually broad indemnity provision because TSI could conceivably take the position that the appraiser is required to indemnify TSI for losses caused by TSI itself in handling an appraisal or resulting from TSI's own negligence.

For example, if TSI conveyed erroneous instructions to the appraiser which resulted in a problem with the appraisal and the lender client demanded that TSI make up a resulting loss, TSI could conceivably demand that the appraiser pay TSI for TSI's own mistake. As another example, class action litigation is becoming more common against lenders and their subsidiary AMCs, TSI could, here again, argue that appraisers whose appraisals are the subject of such a lawsuit must indemnify TSI for defending the lawsuit because it relates to their appraisals. There may be questions about whether such an overbroad indemnity provision is enforceable under various states' laws, but that is a question that would only be resolved after an appraiser is embroiled in litigation by TSI.

2. Mortgage Repurchases. Another significant issue is raised in the second paragraph of section 7. In this part, the appraiser:

"agrees that if a mortgage lender is required to repurchase a mortgage loan for any reason in any way related to [among other things] . . . any appraisal report submitted by Appraiser pursuant to this Agreement, Appraiser shall pay [TSI] an amount equal to the repurchase price paid by such mortgage lender to repurchase such mortgage loan."

The appraiser is further required to

"pay the reasonable attorney’s fees of [TSI] incurred in enforcing Appraiser’s obligations hereunder, including, with [sic] limitation, the obligation of Appraiser to pay [TSI] an amount equal to the repurchase price of a mortgage loan as set forth above."

There are obvious problems with this provision. In particular, there could be many reasons why an originating mortgage lender might be contractually forced by a mortgage purchaser to repurchase a mortgage based on something in an appraisal that have nothing to do with any error by the appraiser.

For example, what if the appraisal disclosed that the subject property was being used commercially and the originating lender was required to repurchase the mortgage based on the disclosure of this fact in the appraisal? That's not an error by the appraiser. Yet, under the language in the agreement, TSI could conceivably argue that the appraiser is financially liable for the repurchase price.

Aside from that unfairness, why should the appraiser be required to pay TSI at all for a repurchased mortgage? TSI isn't the lender and has not sustained any loss. (Of course, TSI might well be guaranteeing repurchase demands to their lender clients and trying to pass that cost on to appraisers). Finally, a repurchased mortgage does not even necessarily result in a loss to the originating lender or a loss equating to the full repurchase price. Yet, under the provision here, the appraiser is required to pay TSI the full "repurchase price" paid by the originating lender. Like the first paragraph, there are serious questions as to whether this language would even be enforceable by TSI -- one of the main issues being that the provision could be construed as an unenforceable penalty. Once again, however, this is a question that would only be resolved in court after TSI has sued an appraiser.

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Unfair State Board Complaints by a National Lender

Source: Appraisal Legal Defense and Insurance Blog by Peter Christensen and Robert Wiley - Legal issues and insurance matters affecting residential and commercial real estate appraisers

 

We've observed a new pattern by a certain national lender. "Risk Management" at this lender has been submitting numerous complaints to state boards based only on single review appraisals which merely indicate "potential violations" of USPAP. I think the lender wants to show that it's "getting tough" on appraisers.

In general, I don't think the tactic of filing numerous board complaints based on "potential violations" of USPAP indicated by a single review is the right way for this or any lender to show good appraisal management practices. For one thing, the practice may backfire on the lender: appraisers subjected to the tactic may claim that it is being used to intimidate appraisers -- just as the blacklisting practices of other lenders have fueled lawsuits against those lenders by both appraisers and borrowers.

I think the better practice for lenders to deal with alleged appraisal performance problems is for a knowledgeable in-house appraiser to obtain and fairly consider the appraiser's view without any threatened action; if there are real issues, then the in-house appraiser should counsel the appraiser and give the appraiser specific usable advice as to how performance should be improved. Only where fraud or genuine incompetence is apparent should the lender file a state complaint.

"Sending anonymous, vague letters threatening appraisers with blacklisting and using form letters to file numerous board complaints about "potential violations" are not the answer."

The most troubling aspect of this particular lender's practice, however, is reflected in the lender's statement in the form letter that: "We are unable to provide any additional information for your investigation."

That's false. In several cases of which I am aware, the lender possessed written explanations from the accused appraisers which fairly defended the subject appraisal reports against dubious review appraisals. But the lender withheld this information from the state boards.

This is an unfair tactic, especially in those states that don't inform appraisers of the nature of the complaint against them and keep the identity of the complaining party anonymous. A lender like this shouldn't file a complaint, while withholding relevant information from the state and claiming "we are unable to provide further information."

Indeed, I've seen an instance where a related lender filed a board complaint in the same manner even after being informed by the accused appraiser that the subject appraisal was a forgery.

Source: Appraisal Legal Defense and Insurance Blog by Peter Christensen and Robert Wiley - Legal issues and insurance matters affecting residential and commercial real estate appraisers

Minimizing Risk on the Fannie Mae Form 1004MC Market Conditions Addendum

Minimizing Risk on the Fannie Mae Form 1004MC Market Conditions Addendum By Peter Christensen

Effective today [4/1/2009], Fannie Mae is requiring the completion of its new Form 1004MC Market Conditions Addendum in connection with all one to four-unit appraisals. Many appraisers have stated serious concerns with respect to the conflicting directions given by Fannie Mae regarding the addendum and the additional strain of the research and analysis -- all in an AMC-dominated environment paying lower fees to appraisers.

In our position of defending legal claims against appraisers, we are most worried about the potential legal risk to appraisers.

To minimize such risk, we are suggesting that our insured appraisers first be careful to address any specific concerns they have concerning the market analysis in the bottom explanation section of the addendum. It is always the best practice to accurately communicate specific concerns about data reliability or other matters in the relevant part of the subject report.

Beyond that basic prudence, we are suggesting that appraisers consider adding the following language or similar language they deem appropriate in the same explanation section:

Appraiser’s "Inventory Analysis," "Median Sale & List Price, DOM" and other observations in this addendum are based on the data source identified above, which appraiser generally believes to be an acceptable source of market data. However, the appraiser cannot verify all of the information in that data source and cannot guarantee the accuracy of such data or conclusions based thereon. The appraiser also cannot guarantee future market conditions affecting the subject property.

Because of the recent implementation of this form, we do not know whether lenders will push back or react negatively to including this language in appraisal reports.

We look forward to feedback from appraisers on this issue.

Source: Appraisal Legal Defense and Insurance Blog by Peter Christensen and Robert Wiley - Legal issues and insurance matters affecting residential and commercial real estate appraisers

Getting the monkey off OUR backs . . . Appraisal Portal "Hold Harmless" Clause

Appraisers continue to express concern to us about potential indemnity obligations under the AppraisalPort user agreement. Short of seeing the indemnity provision taken out, appraisers have asked if we (LIA) can suggest any language for use in their reports relating to this issue.  (reprinted with permission)

We have developed the language below. Appraisers may consider including this language in reports they deliver via AppraisalPort if they are concerned about the technology and potential liability under the user agreement. This approach is far from ideal, but it is designed to decrease the likelihood of claims by lender/clients for which AppraisalPort might claim indemnity from the appraiser.

The reason this approach is not ideal is that AppraisalPort/FNC would likely contend it does not constitute a change of the user agreement. The primary intent, however, is to reduce the likelihood of a claim and its possible success.

The lender/client has directed that the appraiser transmit the content of this report via AppraisalPort. Pursuant to its user agreement, FNC/AppraisalPort has disclaimed any warranty that AppraisalPort will be error free, has advised that information reported to and by AppraisalPort may be subject to transmission errors, and has indicated that use of AppraisalPort is at the user's sole risk. Accordingly, the lender/client should make its own determination as to the accuracy and reliability of AppraisalPort for its use. The appraiser makes no representations and specifically disclaims any warranty regarding the accuracy or portrayal of content transmitted via AppraisalPort or its reliability. The appraiser uses such technology at the specific direction and sole risk of the lender/client. At its request, the lender/client may obtain a true copy of the original report directly from the appraiser via email (PDF), mail or other means.

As we have said before, to this date, we have not received a claim against one of our appraisers relating to use of AppraisalPort or received any report of AppraisalPort demanding indemnity from an appraiser. The indemnity provision in the user agreement has existed for several years. Thus, the risk to appraisers appears to be very low.

Nevertheless, it is FNC that is in the best position to gauge the risk, and it has included the broad indemnity language in the user agreement. It is also worth pointing out that the indemnity provision in the user agreement applies to all users of AppraisalPort, not just appraisers -- thus, AppraisalPort/FNC could conceivably demand indemnity from a lender or AMC using the service.

Cick here for the source article

Source: Appraiser Legal Defense and Insurance Blog

The End is Just the Beginning - Virginia REAB Hears Petition To Prohibit Use of Appraisal Delivery Webportals That Transmit Altered Appraisal Reports

Appraisal Scoop reported previously (click here) on the May 22, 2008 Virginia State Board for Real Estate Appraiser's (VREAB) meeting to discuss among other things, a petition submitted by George Dodd, SRA.  Click Here to: Download Virginia_Appraisal_Board_Petition_052208.pdf

The petition was written to prevent online sites, or web-portals from changing or otherwise altering reports that appraisers prepare.  Web-portals would include such companies as: AppraisalPort, RELS, and other AI ready required companies. It also seeks to limit the illegal PDF stripping down, and programs that erroneously copy information from reports such as Lighthouse.

Click here for Part 1 and for Part 2 and for Part 3

August 19, 2008 - Legislature and policy is one of those things that can baffle most people. I know that sometimes I can get downright angry at the inefficient ways government can work sometimes. Here we all are in Richmond, VA, the front lines to the fight for appraisal portal conversions.

On the 19th a decision was to be made as to whether or not appraisers were to be allowed to continue to do business with companies that require reports to be converted to formats that were not the true copy of the appraisers report. A victory would not be had by either side of this fight .

Neil Olson, Chief Legal for FNC, Inc was there to give presence to the companies who want to continue to require appraisers to submit limited reports. * See comments I once again applaud Mr. Olson for being the lone offense, as no one from First American was there, no one from Lighthouse, no one from any other company that would be even slightly allied with FNC’s struggles. There were no lenders there to support Mr. Olson’s claims from the lender’s side. Without a lender there to agree this is the only way they want these reports, Mr. Olson appears to be painting with broad strokes when he insists they do.

George Dodd, SRA was there to thank the board for their time looking at and considering his petition. This same petition asked that no companies that required the practices of conversions of reports be allowed to do business in the Commonwealth of Virginia.

The committee was required to recommend that the petition be rejected. It was simply not written in such a way that was enforceable. The petition sought to limit an industry that it did not oversee. The Board’s opinion was to leave the committee open to further discussion and allow it to look even deeper into the entire process.

Mr. Dodd humbly accepted that decision, as if he knew it was coming. He seemed pleased to get the opportunity to continue on to help shape what is ultimately going to be an important step in the re-establishment of appraiser’s independence.

Over the last several months there are some things that should be taken into account that cannot be just coincidence. When the Board originally met in the late spring I began this series of stories. The first one seemed well received. The second one was followed by something I did not expect. Within a day of the second story being published Fannie released a statement:

"Since relocating our appraisal ordering process to AppraisalPort in April, we have discovered limitations within various appraisal software providers using the AI Ready format when trying to send the level of documentation that the NUC requires."

I have no clue if yours truly had anything to do with it. I do hope that I had a small part in it. Within this same time frame AppraisalPort released something that they had never offered prior in their previous several years of operating. They finally made a PDF converter available for their ENV format.

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The School of Hard Knocks: Real Life Appraiser's Account of Mortgage Fraud and its Consequences

According to the USA Today story: Las Vegas called ‘mortgage fraud ground’ – “In recent years, there have been so many mortgage fraud cases, the bureau and local prosecutors have had to establish a special task force to combat the problem.”

Think it can’t happen to YOU!?   Continue reading this real-life appraiser’s hard-knocks educational experience where mortgage fraud lay behind the sales transaction. 

The seller was not selling and the buyer was not buying. The loan officer falsified the Verification of Deposit from the bank to make the 21 year old, unemployed straw-buyer, appear to earn $18,000 a month.

The aggrieved lender discovered the fraud 3 months later when it performed due diligence checks prior to packaging the loan for sale in the secondary market.  Upon discovery, the loan officer, fled to California and became invisible. 

The owner of the mortgage company had contact from bank attorneys holding her financially responsible for the criminal fraud perpetrated by the agent working under her license. Quickly attempting to pass responsibility onto the appraiser, the mortgage company owner sent a complaint to the state claiming I had committed fraud by over-valuing the home and demanded that the state revoke my appraiser's license. Noticeably absent from her letter was any mention of the fraud committed by the loan officer in her company.

In short order the bank cast a wide net to recover its losses not only from the mortgage company, but from me, the review appraiser who agreed with the value, Landsafe for hiring the review appraiser, the home owner and the straw buyer who hadn't submitted a tax return for the prior two years and claimed an income of $4,000 on the return from three years back.  Bank attorneys apparently did not feel the loan officer/escape artist could be found or should be mentioned in the lawsuit. 

The seller and straw buyer both answered their court depositions with attempts to lay blame on the appraiser by using statements such as "I hired an appraiser to tell me how much my house is worth." 

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Outside the Boxes: Part 14 - 12 Tips To Increase Your "ODDS" ... Observe, Disclose, Disclaim & Specify

AUTHOR:  Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. He can be reached at lvreqa@cox.net 

As licensed professionals, appraisers are required to "promote and protect the public trust" in our profession. Clients and the public have a right to expect ethics, competency and consistency from all appraisers, even when many of those same clients contribute to problems in the market.  We are expected to provide a "credible appraisal", one that is "worthy of belief".

Over the next several years, "odds are the profession will change", perhaps dramatically. During this time appraisers will become the "odd man (or woman) out" as some of the blame for market conditions will be laid at our doorstep and rightfully so as many in our profession were willing participants of "housing gone wild".

The initiatives and actions we take from this point forth will determine the trust placed in the appraisal profession by clients and the public. The real estate industry that we are part of has lost credibility and to restore the confidence, we need to be pro-active and using the "ODDS Rule" will help. 

• Observe the property and the market.
• Disclose to the client what you did and did not do.
• Disclaim that to which you are not qualified to evaluate.
• Specify your reasons and logic.

Often, clients, underwriters, loan officers, buyers and sellers have questions. Some are reasonable and some are absurd, however all are important. We can't become a "culture of no". We must take the steps necessary to respond appropriately since our responses reflect on our profession as well as ourselves. 

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How To Stay OUT of the courtroom - Attorney advice on Appraisal Report Preparation

Author: John C. Carlson, Certified General Real Estate Appraiser:  29 years of appraisal, expert witness and litigation experience.  John is an Associate Member of Certified Fraud Examiners and specializes in high value single family homes and commercial and industrial buildings.

I attended the AI "Appraising Special Purpose Properties Seminar" in Norwalk, CA yesterday. One of the speakers was Ms. Lindsay McMenamin, ESQ, an attorney for Gaglione & Dolan. She is a former SRA & now an attorney for this firm who specializes in defending real estate professionals, especially appraisers. One of the firms main clients is Liability Insurance Administrators in Santa Barbara.

McMenamin had some interesting statistics RE: appraiser lawsuits (Fall 2001 thru Feb. 2007):

• 200 lawsuits nationwide, 97 in CA
• 82 of 97 suits in CA involved Residential Appraisers
• In 58 of the suits there was $0 paid out.
• In 12 of suits $10,000 or less was paid
• Largest loss was $65,000 - this involved a Commercial appraiser.

She identified the following 11 problems and ways to protect yourself:

1. Have a "Letter of Agreement" with your clients.

2. Have a Cover Letter in your appraisals.

3. Identify problems encountered in the appraisal process several times throughout the report in many different sections. 

4. Specifically identify Intended User & Intended Use of report. Be very careful when providing copies to anyone unless they are one of the Intended Users

5. Try not to do "copy-overs".  She noted one appraisal that, as I remember, was a property somewhere in So. California, that had San Francisco area data in it....Big OOPS!! 

(Last year I opposed an appraiser in a trial where the Date of Value was in 2004. ALL of the opposing appraiser's market area data was from an appraisal that was completed in the market area, but in.....2006!  The appraiser did not provide any data relevant to our 2004 DOV - the Judge did not like this!)

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