Excerpt from LIA "Claim Alert" Newsletter:
It has been eight years since the URAR form was revised. From 2005 to mid-2008, the real estate market experienced a boom and a bust the likes of which we have never seen before, and we are finally seeing a slow recovery. Also during this period, the economic recession and poor lending practices lead to new regulations in both the appraisal and banking industries. Based on the new regulations, Fannie Mae/Freddie Mac mandated appraisers to add more information to the URAR form.
As of March 2009, the Market Conditions Addendum to the Appraisal Report required appraisers to research and analyze the general market conditions. In September 2011, Fannie Mae mandated that appraisers employ the Uniform Appraisal Dataset (UAD) as part of the URAR form. The goal was to standardize information supplied by the appraisers on the forms, especially as to descriptions of
quality and condition of the subject property and comparable sales. Another directive was that whenever adjustments are made to an appraisal for the year the dwelling was built (actual age) vs. the effective age, the appraiser must provide an explanation for the adjustments. Finally, Fannie Mae also dictated
that the proximity of comparable sales to the subject must be stated in miles and include the "applicable directional indicator". Many of these changes were a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).
These dizzying changes make the appraisal process more difficult than ever. Those appraisers who fail to keep up with these new regulations risk potential liability. We asked our national claims counsel to highlight a few areas of concern for appraisers.
Appraisal Dataset (UAD)
The UAD is a significant change on the URAR form that could create more liability for appraisers. Instead of vaguely stating the property is in "average" condition, appraisers must select the UAD code which reflects the condition of the property as defined by Fannie Mae. By having to select a unique
code with a specific definition, any adjustments made for the selection of a different code for the comparable could be a minefield mainly because of the preciseness of the code.
Let's say, for example, the appraiser decides that the subject property's condition falls under C2, i.e., the improvements feature no deferred maintenance, little or no physical depreciation, and require no repairs. However, the appraiser then notes that Comp 1 condition is C3, i.e., the improvements are well maintained and feature limited physical depreciation due to normal wear and tear. Let's also say the appraiser makes a $50,000 adjustment to reflect these differences. The report should explain this adjustment and the work file should provide support for this adjustment...perhaps paired sales, or
other appraisals reflecting similar adjustments of property in that approximate
Adjustments now must be precise and must be fully supported by specific numbers to avoid USPAP violations. If the subject report ends up in a lawsuit, testifying that the $50,000 adjustment between the
subject's C2 condition and Comp 1's C3 condition is based on your "experience" or on vague "market conditions" will likely not be enough to convince a judge or jury. The definition of each UAD code is too precise; your adjustments have to be just as precise and have to be consistent within that neighborhood and for similar housing.
Finally, because of UAD, it is now more important than ever for you to review your report before transmitting it. Be sure that the UAD codes you selected were correct... was that really a water view or did you mistakenly select that code when you meant to say no view? If you selected C2 and your comps are all C3, have you made adjustments that can be supported? Or, did you select the same condition for your subject and your comps to avoid making adjustments?
Although it was a hard fought battle before the 2005 URAR form was finalized, no one could convince Fannie Mae that Certification #23 was a Pandora's Box. As we suspected, and as was stated in our
claim alert of November 2005, Certification #23 has indeed increased liability for the appraiser. No matter how many times in the appraisal the "intended user and use" is stated, the claimant will argue that the wording in Certification #23 creates a duty to and allows reliance by the borrower. The question then comes down to, "for what purpose may the borrower rely on the appraisal?" We argue that if the court decides Certification #23 takes precedence over the intended use/intended user language then it should be decided that reliance can only be as to value. It is not reasonable to assert that a borrower can rely upon the appraisal for information about the property's condition because that is not the purpose for which the appraisal was prepared. In order to strengthen that argument it is still recommended that the appraiser continue to include language in the report that states...
"...the appraiser is not a home inspector and the appraisal report is not a home inspection. The appraiser only performed a visual observation of accessible areas and the appraisal report cannot be relied upon to disclose conditions and/or defects in the property."
The reliance issue is still complicated because of certain software problems. Some appraisers continue to use software that indicates the appraisal is for "Client/Borrower". If your software still shows this on the top of many of the addenda (photo pages, maps, etc), contact your software dealer and demand they change the program or switch to a software program that does not have that misleading information. Due to this problem many courts have sided with plaintiffs who argue that this language proves the appraisal is prepared for the client/borrower, so the borrower can rely on the report, for any purpose.
Misuse of URAR Forms
Another issue that we often see is some appraisers are still using Fannie Mae/Freddie Mac URAR forms for private party work. The 2005 URAR form is only to be used for federally-related financial transactions. The untouchable boilerplate language set forth in the limiting conditions, assumptions and
certifications refers specifically to "the lender". The appraiser using this form for other purposes such as divorce, tax reductions, estate appraisals, etc., is risking liability for creating a report that is misleading to the reader. This is especially important if your report is submitted to your state licensing board in conjunction with a complaint, and we have seen discipline imposed as a result.
It is the continuing responsibility of every appraiser to keep current as to new developments, including which forms to use in connection with which assignments and how to best convey all necessary information about the property that is being appraised so as to assist the client with whatever decision is
being made. You should check with your software company or your state licensing board for residential forms for non-federally related transactions. Ignorance is not bliss; ignorance leads to missteps, which lead to liability.