AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
This morning I received a private email with an excerpt from a post on an appraisal forum. The following is the post:
I know of an appraiser who was doing the same thing - merely reporting sales to his "buddy" LO all with the clear understanding it wasn't really an appraisal-they just want to know the properties "range of value." The LO used the comp searches to fund loans, without the appraisers knowledge. Several deals went south and the appraiser was named a party to a civil action. He never received a dime. It will cost him several thousand dollars to either defend himself or buy his way out the the action and may be subject to disciplinary action by the state regulatory agency.
My contact wants to know -- Is there any veracity to the story? I recall this took place in Southern Cal. Comp checks have been used as a valuation tool to fund loans - true or false. True, not false.
I replied privately and then thought to make the topic public. So, I will try and write from memory what I said in response, with some new thoughts thrown in to boot.
With the advent of Desktop Underwriting and the technologies available, loans can be funded and sold to FNMA and FHLMC with an array of valuation products or documentation in file.
Remember, the Seller/Servicer may originate directly or through loan brokers, package and then sell a pool or loans at a certain yield rate to the Secondary Mortgage Market which includes FNMA/FHLMC and other firms, including Wall Street firms. Each player in the Secondary Mortgage Market may have their own set of rules in terms of valuation documentation. I'll bet Zillow would suffice in some cases, fewer than 10,000 per month though, not a lot.
Seller/Servicers buy Commitments from the Secondary Mortgage Market players to buy pools of loans in $100,000,000 to $1,000,000,000 blocks.---
Entities from mortgage bankers like Countrywide to big banks like WAMU will put together a pool and sell it at a net price, keeping the additional Fees (Fees are good for Stock Prices and Bonuses. Management likes Fees. Fees make Stock Prices go up and Bonuses go up. Fees is good even if RESPA is violated. Fees is good).
Loan Pools are sold Servicing Released or Servicing Retained. They are sold with or without Buy Back Warranties or Guarantees. Some Loan Pools are enhanced, resulting in better pricing for the Seller, by providing assurance that All the Appraisers are Insured. {Let me know when you start to see Red}.
Another form of enhancement is to get Private Mortgage Insurance on all the loans. This may be one of the main reasons FNMA changed the Certification language last year, to make sure the PMI companies had a clear path to sue the appraiser. And they do, they usually sue in Federal Court. Why, because they are in some other state, other than where the appraiser is.
Servicing is merely another source of income for the lenders and is valuable. The larger the Servicing Portfolio, the more valuable a company is. A lender with billions of dollars worth of Servicing is a far more attractive target than one with none.
Back to Valuation.
The following is a list of products that are used in collateral underwriting and their rank.
The first is for the best loan with best credit score {FICO} and Loan To Value Ratio {LTV}, the last is the highest risk loan
- A List of Assessed Values in the area
- A List of Sales in the Area
- An AVM
- A Drive-by Appraisal
- A Drive-by with Interior Inspection and Pictures {I am not sure who made this up, it is not a part of the original program, but is asked for at times}
- A URAR Appraisal report
Most appraisers have no sense about giving away "Comp Checks", "Lists of Sales" or "A Range of Value". To me these are product's to be sold, since loans can be funded on it. Just a List of Sales will do, no need to do any filtering, just give them raw data from the area. $25-$50, thanks.
If they really need an appraiser to do a "Comp Check", ask if they can fund a loan with it and how much they are charging the borrower for it? Then send them a bill. If they charged $200, bill them $200. Better yet, set up an account and have them prepay for 10 Comp Checks. Then open a file and make it USPAP compliant each time.
But I digress. Appraisers have been sued for what I call "Cocktail Conversation" where someone they knew asked about a property they know and they told them what they thought. People do this, it is a normal part of real estate chatter; everyone does it. Our oldest is a 40's defense lawyer, with many friends on the west side of L.A. She told me everyone always wants to know how many "Square's" you have and what your property is "Worth", just casual conversation, breakfast, lunch and dinner in some circles.
Appraisers are Licensed, and have been sued for things from Lists of Sales to Cocktail Conversations. There are two types of appraisers, those who have been sued and those have yet to be sued.
Being aware of why we were Licensed, to make it easier to sue us, is not taught in Principles, Practices or USPAP. I am not sure why. Maybe it is too scary and no one would come into the business if they really understood the risks. Not to mention the criminal liabilities.
In a case I worked on in 1984 an appraiser was sued after a 2nd TD defaulted on a house he had appraised in the Camarillo Highlands area of CA. A nice area in Ventura County. The lender was Arc's Mortgage. They sued for their loan amount, the interest and penalties and payments made on the 1st TD, the gardener, utilities, repairs, insurance and taxes on the property. The $50,000 2nd, became $125,000+. After loosing, the appraiser filed BK.
We appraised his home and asked the casual question, "Why are you getting yur house appraised". Boy did we get an ear-full. He just broke down and started crying, as if there was something we could do or as if our merely understanding his plight would help. Unfortunately, the values had gone down, he had borrowed to fund his defense, his wife had left him and he had no real equity left in the home. The lender got it released from the automatic Stay that the BK filing allows.
In their pleading, they used every SREA course he had taken against him, saying he had not complied with the processes and procedures as taught and had not complied with the Code of Ethics of the professional organization of which he was a Candidate member. They also brought into their pleading the Second Restatement of Torts by Dean Prosser http://en.wikipedia.org/wiki/William_Prosser, the section I remember went something like this "when a professional provides information for the reliance of others and a financial loss is suffered based upon that reliance, they are responsible for the loss". Or something like that. It does not matter if the quote is not 100%, you get the thrust of it. It can be researched to your hearts desire. I doubt that it has been used against appraisers more than 10,000 to 30,000 times. But-Who-Knows?
There is no way of knowing how many times appraisers have been sued, or indicted, as there is no clearing house, no one keeps track, not even appraisal organizations or the Appraisal Foundation. But why would they, that is not their mission. There mission is to provide written standards and the curriculum or courses to be followed for the education necessary to attain compliance.
With Licensing came greater liabilities. Now we have a national standard applicable to all Licensees, whether they be a high school drop out, a Trainee, or a dual degreed and dual designated old guy like me {my middle grand daughter got me the car license frame "Old Guys Rule"}. We all actually certify neutrality, objectivity and certify to the use of good appraisal procedures. Any level of product we deliver, written or verbal, can be subject to liabilities for failure to adhere to standards, or ethics, or both.
I do not think the question asked is an Urban Legend, it has probably happened hundreds, no, thousands of times, but maybe not 10,000 times yet, and certainly not more than 30,000 times since 1990. I do think appraisers will get sued more in the future than in the past.
Suits against appraiser squirt up, or spike up once a market goes from Boom to Bust. If you work in a market area that is Booming, there is little risk. If not, do like Blanche Evans http://realtytimes.com/rtcpages/blanche.htm writes about, and become part of the crowd that follows the Booms, the Rolling Boom group.
She says that people follow the Booms in her book Booms, Bubbles and Busts. No one in my neck of the woods has picked up and left because the market stopped going up a year ago. I read this book the week it came out and have a copy if anyone wants to borrow it. I did not buy her approach at all, it felt more like a Booster for NAR, but that was January, and even until the April Sales Statistics, NAR had kept trying to spin the Soft Landing hype. Now they have projected twice the amount of market declines.
The next five years will be interesting. I wonder how many Baby Boomer appraisers will not renew their license, and how many Trainee's will never get their hours but leave or go back to other endeavors. Not more than 10,000 to 30,000 I'd say. Naw, I take it back, that can't be possible. Never mind. Maybe it will only be 20%.
Verbal value estimates by a licensed professional deserve a File Memorandum and deserve to be on our Logs. No need to get in trouble with the License Board and be sued too or is it visa versa? {It is hard being dyslexic unless you use a 10% Cap Rate and Multiplier}.
For those who really want to know about Liability and want a good book for their Appraisal Library {what a concept!}, Mark Levine, Phd, MAI wrote a book based on Precedent level court cases in which the appraiser was sued and lost. It is available used from $50 at Amazon.
My opinion is that at $300, there is no allocation in the fee for the due diligence one needs to do to comply with USPAP and good appraisal procedures. 2.5 to 3 times that fee level would be more like it. A free estimate of value makes no financial sense at all, let-alone professional liability issues.
-PS: One of the best of the 30+books I have read this year dealing with financial crimes, swindles, the S&L Crisis, etc. is "Big Money Crime". It opened my eyes to things well beyond belief. And I thought I was pretty aware, having researched real estate frauds and appraiser liability issues for over 20-years and having written several CE seminars on different aspects of liabilities for the appraiser.
AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
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