Appraisal Scoop

LIA "Claim Alert" Newsletter: Revisiting The Fannie Mae/Freddie Mac 2005 URAR Form Ambiguities and Liabilities

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
location.

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?

Reliance issues

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.

Conclusion

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.

Click Here for the complete LIA "Claim Alert Newsletter"

Seven Cases the Defendant Appraisers Won Based on Expiration of the Statute of Limitations - Appraiser Law Blog

GUEST POST: Peter Christensen is an attorney who advises professionals and businesses about legal and regulatory issues concerning valuation and insurance.  He serves as general counsel to LIA Administrators & Insurance Services.  He can be reached at [email protected].

I am biased in favor of defendant appraisers.  I always root for the  defense, even if it's one appraiser suing another appraiser (as in one case below).  Defense is our business.  Here, are seven cases where the  defendant appraisers won based on a statute of limitations defense.   That means even if there was something wrong with the appraisal at  issue, the defense counsel still won the case.  So, you have to give the  credit to the defense counsel.  That's not to say there really was a  problem with the appraisal in each case below -- it just didn't matter  if there was.

READI members can find more cases like these, including cases where the appraisers lost, here on www.readimember.org.

Here are the seven cases:

Arkansas

Varner v. Peterson Farms, 371 F.3d 1011 (2004). Applying Arkansas law, a federal appeals court upheld dismissal of  fraud, unjust enrichment and conspiracy claims against an appraiser, and explained that the "statute of limitations begins to run-in the absence of concealment of the wrong-when the negligence occurs, not when the  negligence is discovered."

California

Bartha v. Deutsch, Cal. Ct. of Appeal, Unpub. Dec., No. F058669 (2010). In an action by an appraiser against a review appraiser for defamation, the California appellate court ruled in an unpublished decision that  the 1-year defamation limitations period applied, not the 2-year  limitations period for negligence. The appellate court upheld the trial  court’s dismissal of the defamation claim against the review appraiser.

Indiana

Farmers & Merchants Bank v. Putnam, Indiana Court of Appeals (2009). Applying Indiana law, a U.S. District Court dismissed negligence claims by lender against appraiser based on 2-year limitations period for  negligence. The court found the bank had or should have discovered the  alleged appraisal negligence more than 2 years before filing the lawsuit against the appraiser because it had earlier alleged in a suit against  the borrower that the borrower lied to the bank about the value of the  property. The court ruled that the bank’s fraud claim, however, would  not be dismissed based on the longer 6-year period applicable to fraud  claims under Indiana law.

Ohio

Flagstar Bank v. Airline Union's Mortgage Co., 128 Ohio St.3d 529 (2011). Ohio does not follow a "discovery rule" for negligence claims against appraisers.  Accordingly, the Ohio Supreme Court upheld dismissal of Flagstar’s negligence claims against appraisers because Ohio's 4-year limitations period begins at  time appraiser performs appraisal.  In the primary claim at issue in the case, Flagstar sued a  residential appraiser about three appraisals performed in 2001 and 2002  for three different loans which defaulted in 2003 and 2005. Flagstar  blamed the appraiser for its financial losses on the loans but did not  file a lawsuit until 2008 – seven years after the first appraisal. On  appeal, Flagstar tried to argue to the Ohio Supreme Court that the  statute of limitations should not begin to run until it discovers the  full extent of the alleged damage it has allegedly incurred as the  result of negligence in an appraisal. The Ohio Supreme Court ruled in  favor of the appraiser. It confirmed that the period in Ohio begins to  run when the appraisal is delivered, and it affirmed the dismissal of  Flagstar’s claim because Flagstar filed its lawsuit years after that  period had expired with respect to each claim.

Michigan

Capital Bankcorp Ltd. v. Landheer Appraisal Service, et al., Michigan Court of Appeals, No. 291966 (2010) (unpublished decision). A Michigan appellate court upheld dismissal of lender's claim against  appraiser based on statute of limitations because lender should have  discovered appraisal faults with reasonable diligence.  The court concluded that the statute of limitations began running from the time that the lender should have discovered the faults if it had acted diligently.  In particular, the lender alleged in its complaint that the appraisal was defective because the appraiser was only licensed, not certified, and that the appraisal was inflated.  The court concluded that these alleged issues would have been discovered by the lender if it had acted with reasonable diligence.  Among other things supporting that conclusion was the fact that the lender possessed an earlier  appraisal with different information than contained in the appraisal by  the appraiser it sued.

New York

LSF6 Mercury REO Investments v. Midrome, Inc., et al., New York Supreme Court, New York County (2012). New York does not follow a "discovery rule" for negligence claims against appraisers and has a 3-year limitations period under New York CPLR 214  (6). Thus, the trial court dismissed two consolidated cases filed by a private equity fund LSF6 Mercury REO Investments against appraisers and appraisal firms because the appraisals were performed more than 3 years before LSF6 filed its legal actions.  (For more information about LSF6 and its voluminous litigation against appraisers, see this article Who Has Been Suing the Most Appraisers?  Two Names You Know.  Two Names You've Probably Never Heard.)

Early v. Rossback, 262 A.D.2d 601 (1999). In this older case, a New York appellate court upheld dismissal of an alleged malpractice claim  against appraiser filed more than 3 years after appraisal and held that the 3-year limitations period under New York CPLR 214  (6) applies to appraiser malpractice claims whether those claims are  alleged in tort as a negligence claim or as a breach of contract.  Again, New York does not follow a "discovery rule" for negligence claims against appraisers.

Click here for the full article: Seven Cases the Defendant Appraisers Won Based on Expiration of the Statute of Limitations

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Appraisers can learn more about ways to reduce their liability risk at www.readimember.org -- a free resource created by LIA Administrators & Insurance Services.

AUTHOR: Peter Christensen is an attorney who advises professionals and businesses about legal and regulatory issues concerning valuation and insurance.  He serves as general counsel to LIA Administrators & Insurance Services.  He can be reached at [email protected].

 

Who Has Been Suing the Most Appraisers? Two Names You Know. Two Names You've Probably Never Heard.

GUEST POST: Monday, October 8, 2012 - Who Has Been Suing the Most Appraisers? Two Names You Know. Two Names You've Probably Never Heard - By Peter Christensen

These are four of the parties who have been suing the most appraisers in 2011-12.  I suspect most appraisers won't recognize two of the names, unless the appraisers are defendants in one of their cases.  The parties are in no particular order, but the last one does file the most lawsuits. 

LSF6 Mercury REO Investments.  This is an investment fund of a private equity company named Lone Star.  LSF6 bought discounted mortgage debt from bankrupt CIT Group in 2008.  In late 2011, LSF6 began suing appraisers in New York as part of what appears to be an experiment with mass appraiser litigation to recover damages from appraisers relating to the defaulted mortgages.  Most of the mortgages and appraisals at issue date to 2005 to 2007.  So far, LSF6 has sued at least 50 individual appraisers and small appraisal firms in New York.  LSF6, however, has lost some of its early New York cases or been forced to abandon others.  Its masterminds made some obvious legal mistakes.  Perhaps seeking a new testing ground, LSF6 filed one of its most recent lawsuits against an appraiser in a Western state.  If LSF6's experiment with mass appraiser litigation pays off for its private equity investors, the appraisal industry will have a dark future of voluminous appraiser litigation. 
 
Lehman Brothers Holdings, Inc.  This company hardly needs an introduction.  It is the financial services firm commonly blamed for the near destruction of our economy in 2008.  So, what's this former giant doing suing individual residential appraisers?  Well, one of Lehman's mortgage origination machines at the height of the real estate and mortgage bubble was its subsidiary Aurora Bank.  Lehman acquired mortgages from that subsidiary and packaged many for sale to other parties. Though it filed for bankruptcy in 2008 and remains in bankruptcy, Lehman began filing sporadic negligence lawsuits last year against appraisers who appraised for loans by Aurora back in 2005-2006.  These lawsuits have been filed or threatened against appraisers in California, Colorado, Florida, Georgia and Tennessee (to name a few states).  Lehman filed its most recent lawsuit against an appraiser last week in Michigan.
 
Heritage Pacific Financial.  This entity is an investment vehicle of some type that purchases defaulted mortgage debt for pennies on the dollar and then tries to recover some of the debt through creative means.  One of its strategies has been to sue the borrowers for fraud, not just breach of the debt instrument.  Because insolvent borrowers rarely fight in court, Heritage Pacific often obtains default judgments against the borrowers without a fight.  A judgment for fraud can be non-dischargeable in bankruptcy and thus potentially will remain collectible against the borrower forever (a judgment can be renewed perpetually in California) or as long as judgments are enforceable.  The judgments are then either collected on or sold to third parties according to marketing literature from Heritage Pacific.  In the last couple of years, Heritage Pacific also has tried suing appraisers for professional negligence and misrepresentation, contending that the appraisers are liable for the unpaid loan balances -- though Heritage Pacific may only have paid pennies on the dollar for the already defaulted debt.   

With respect to its borrower actions, Heritage Pacific is facing at least one class action for unfair debt collection practices.  Separately, it has been subject to state action for alleged securities violations concerning its investment offerings.  The Center for Investigative Reporting's California Watch published a report on Heritage Pacific earlier this year (link).

Federal Deposit Insurance Corporation.  The FDIC's tear against appraisers continues unabated.  From January 1, 2011 through today, it has sued approximately 140 individual appraisers and small appraisal firms relating to defaulted loans of failed lenders under its supervision as receiver.  It has identified approximately 400 additional individual appraisers by name as grossly negligent in its two lawsuits against national AMCs.  Most or all of those 400 appraisers recently received a document entitled "notice of claim" which purported to give notice that civil claims for damages would be made against them relating to the appraisals in the FDIC's two AMC lawsuits, but the notices do not appear to have come from the FDIC.  Almost all appraisals that the FDIC is suing over date to 2005 to 2007.  Some appraisers in high risk states now have E&O policies that exclude coverage for damages awarded to the FDIC. The FDIC, acting as receiver for failed Amtrust Bank, filed its most recent lawsuit against an appraiser in September in Ohio. 

 
The FDIC's litigation tactics against appraisers also have been questioned.  It has been using a law firm called the Mortgage Recovery Law Group to make demands on, subpoena and sue appraisers across the country.  The firm is staffed by personnel formerly employed by Indymac Bank, which itself failed and is under FDIC receivership. 

 

One attorney in the FDIC's law firm held the title "Director of Quality and Fraud Risk Management" at Indymac.  A non-attorney staffer formerly employed at Indymac held the title "Vice President of Fraud Prevention and Loss Mitigation."  In some cases, these law firm personnel play the role of a witness for the FDIC; in other cases, the law firm's lawyers represent the FDIC as attorneys.  Some might think the FDIC's utilization of former management insiders at the failed bank is clever, but other people may think it's repugnant that former insiders are now profiting from their management work in Indymac's pilothouse, while others are being sued for it.  In one of its cases (not handled by the Mortgage Recovery Law Group), the FDIC is suing two appraisers -- husband and wife -- over appraisals done years ago.  The husband appraiser is now deceased and the wife appraiser has dementia.  It really is the FDIC against "mom and pop."
 
I could add a few regular lenders to the short list above as suing a fairly high number of appraisers and a couple lenders do sue more often than others, but it's not really newsworthy that appraisers' named lender-clients sue them and the lenders actually don't sue very often as compared to their mortgage volumes.

Does it seem like commercial appraisers have been left out?  They should not feel that way.  First, in recent months, the FDIC and its outside law firms have begun suing and sending subpoenas to more commercial appraisers.  Second, the litigation described above is merely the most frequent, not the most severe.  As written about elsewhere in this blog, the three biggest appraisal negligence lawsuits currently pending concern commercial appraisal work. 

 

Should I Attach My E&O Declarations Page to My Appraisal Report? - Peter Christensen

GUEST POST: Peter Christensen is an attorney who advises professionals and businesses about legal and regulatory issues concerning valuation and insurance. He serves as general counsel to LIA Administrators & Insurance Services. He can be reached at [email protected].

Because some AMCs still wrongheadedly insist that appraisers do it, we are asked this question a lot: "should I attach my E&O declarations page to my appraisal report?" The answer is always the same: it's a bad idea. It's bad for both the appraiser and the client/AMC. It is perfectly reasonable for a client or an AMC to ask for proof of E&O insurance and ask to receive updated insurance information each year. That's common to many professions, but there is no good reason to require that the information be included within or attached to appraisal reports. (Lawyers like myself certainly don't attach proof of insurance to our opinion letters or legal briefs.)

Why is it a wrongheaded practice?

Let's start with this basic fact: the insurance policy that the appraiser has at the time of performing an appraisal -- and thus the policy that the appraiser would attach to a report -- will most likely be irrelevant to any insurance that the appraiser may have if a claim by a lender or AMC later arises. The reason for this is that all appraiser E&O insurance -- like almost all other professional liability insurance -- is issued on a claims made basis. This means that the policy that will cover the appraiser is not the policy that the appraiser had in place on the date of the appraisal but rather the policy that the appraiser has in place years later when the lawsuit is filed or the claim asserted. Since almost all claims by lenders or AMCs arise years after delivery of the report, whatever policy may be attached to the report is usually irrelevant. (Note: for appraisers and AMCs, the more critical issue for them to look out for regarding appraiser E&O insurance coverage is to make sure that appraisers are not losing coverage for prior appraisal work by moving to policies which will not cover prior acts. See "A Serious Warning for Appraisers and AMCs About Some Risky E&O Insurance.")


So that makes the practice wrongheaded. Why is it a bad idea from a risk point of view?

The main reason why we advise against attaching E&O information to reports is that it results in more claims being asserted by property owners and borrowers against both appraisers and AMCs. These parties, of course, are neither clients nor intended users. Attaching E&O information to an appraisal report simply invites a few more of these parties to threaten or bring claims. I don't want to overstate the problem because the existence of insurance does not have anything to do with most claims -- lenders and borrowers will generally sue regardless. But for a few people, seeing insurance information attached to a report will spark the idea of making a claim. We've seen many claims reported directly to us by borrowers when they are a disappointed with the value and cannot refinance. We've also received claims from homeowners who've alleged things as petty as square footage being off by 2% and then expected a payment as if an appraiser's E&O were a manufacturer's warranty. Many of these claims reported directly to us probably would not have been sparked except for the insurance information that the borrower saw attached to the report. (Claims like these, of course, are defended and rarely result in any recovery to the claimant but all claims cost money to defend.)

We realize that some AMCs and lenders nevertheless require appraisers to attach their E&O to reports. There's no law or regulation against that, but we suggest that the appraiser try to reason with them and explain:

1. You are happy to supply the AMC or lender with a copy of your E&O declarations page that they can keep on file.
2. Attaching your E&O to your report not only exposes you to unnecessary risk of claims by third parties but it also makes it more likely that the AMC or lender will be dragged into a case filed by a homeowner or borrower. (Yes, we've seen AMCs themselves dragged into lawsuits as a result of problems that arose in connection with E&O being attached to a report.)

If those lines of reasoning don't work, we suggest attaching your E&O information only when required for a specific client. Don't make it a general practice.

Click here for the full article: Should I Attach My E&O Declarations Page to My Appraisal Report?

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Appraisers can learn more about ways to reduce their liability risk at www.readimember.org -- a free resource created by LIA Administrators & Insurance Services.

Peter Christensen is an attorney who advises professionals and businesses about legal and regulatory issues concerning valuation and insurance. He serves as general counsel to LIA Administrators & Insurance Services. He can be reached at [email protected].

 

8 Biggest Appraiser Liability Cases - Appraiser Law Blog

8 Biggest Appraiser Liability Cases (Updated) By Peter Christensen (Appraiser Law Blog)

I have described below the 8 biggest appraiser liability cases with which I am familiar that are currently pending in the U.S. These are cases that specifically name appraisers, appraisal firms or appraisal management companies as defendants. That's an important distinction because the appraisal industry has been fortunate that only a small fraction of litigation about financial losses blamed on appraisal deficiencies actually names any appraisal defendants. Yet, the stakes below are very significant for the appraisal industry because the realistic measure of damages at issue in just these 8 cases -- not the plaintiffs' puffed-up alleged damages -- is more than what the whole industry paid last year for its professional liability insurance on a collective basis, by a factor of 3 or 4.

The cases below are ranked based on the approximate alleged damages demanded by the plaintiffs or the proposed settlement amount. The first two cases involve incredible damage claims, but I wouldn't draw any conclusions about those two cases, other than the fact that they show appraisers are very much at risk for big claims made by parties who are neither their clients nor intended users. The plaintiffs' claims in those two cases are outlandish.

One thing that is remarkable overall about these appraiser litigations is that they continue to be filed long after the peak of the real estate bubble and beginning of the lending crisis in 2006-2007. Most of the claims in these cases concern appraisals delivered in 2005-2006. See related article on www.readimember.org (registration is required and limited to appraisers): "What is the Statute of Limitations for a Lawsuit Against an Appraiser in My State?"

1. $8 billion alleged damages. Luxury resort development appraisals. Property owners v. lender and appraisal firm. Filed January 2010.
2. $2 billion alleged damages. Luxury resort development appraisal. Borrower v. lender, appraisal firm and appraiser. Filed February 2012.
3. $250 million alleged damages. Luxury resort development appraisal. Hedge fund loan investors v. appraisal firm. Filed October 2011.
4. $153 million alleged damages. 219 residential appraisals. FDIC v. AMC. Filed May 2011.
5. $129 million alleged damages. 194 residential appraisals. FDIC v. AMC. Filed May 2011.
6. $75 million pending settlement. FHA residential appraisals. Whistleblower appraiser v. lenders, AMC and individual managers. Filed May 2009, settlement pending.
7. $48 million alleged damages. Residential appraisals. Lender v. mortgage originator and appraisers. Filed 2010.
8. $20 million alleged damages. Industrial property appraisal. Tenancy-in-common investors v. appraisal firm and appraisers. Filed 2010.

The NY attorney general's suit filed in 2007 against a national AMC is still pending, but the NY attorney general does not appear to be seeking compensatory damages and is seeking instead statutory penalties or restitution in amounts that have not been specified in public documents.

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

Nice Guys Finish LAST! Clients file complaints after getting appraisers to "Second Guess" their own appraisals.

T.J. McCarthy, of T.J. McCarthy & Associates, Tinley Park, IL has the following assessment of the AMC and Lender practice of making post-closing calls to appraisers to question how some of the adjustments were made and get appraisers to second-guess their original appraisal process.  The following is being reprinted from an Illinois Coalition of Appraisal Professionals (ICAP) alert.  

Good afternoon Appraisers,

I am writing to our residential members regarding a growing problem that ICAP is concerned with regarding lenders and AMC’s filing complaints against appraisers.

THE SETUP:  You receive a call from a lender or an AMC who wants to talk to you about an appraisal assignment you recently completed for them.  The call usually comes from the QC Department at the post closing stage of the loan.  They start questioning you on your line item adjustments.  All the comparables are on smaller lots then the subject property and they feel your adjustment for lot sizes seems a bit high.  You want to be a good little appraiser and not upset your client so you agree that pe rhaps they could have been a little lower.  While they have you on the phone, they also ask you if you think your time adjustments were a little aggressive.  Again, not wanted to upset a good client, you tell them that maybe you were a little aggressive (even though you really don’t think you were…you’re just trying to appease them), and you state that you will try to find another public data source in the future that is more conservative.  Your client thanks you and even tells you to have a nice day.  You hang up the phone thinking you handled that rather well. (The following is simply a hypothetical situation used to get a point across)

FAST FORWARD:  A month later you receive a letter from the Department of Professional Regulation – Appraisal Division.  Your great client filed a complaint against you stating that you openly admitted to them in a phone conversation that you falsely inflated the value of your appraisal by using inappropriate site adjustments.  You also stated that you often use non-traditional data sources to intentionally report market trends that are lower than normal to arrive at higher value conclusions.  YIKES!!

THE REALITY OF THE SITUATION: This is really happening to appraisers and since the Dodd-Frank Act more and more lenders and AMC’s are sending in complaints on appraisers. 

MORAL OF THE STORY:  There is no question that the appraiser is getting slammed here for trying to be a “stand up” guy, attempting to clear up gray areas in their report.  They’re engaging in what they perceive to be an honest dialogue with the QC department (long after the loan has been funded). Unfortunately, at the post-closing stage, the lender isn’t looking for you to have a change of heart on your final opinion of value. There are no changes that should be made, but now you have given the QC department ammo for a state complaint.

Also, you should never change parts of your appraisal because you think it will make your client happy.  They don’t drive the process.  Perhaps you don’t even realize that you are giving someone a reason to file a complaint against you when you agree to the slightest alteration or allow someone elses opinion to dictate how you will complete your assignment.  In the meantime they are on the other end of the phone writing down everything you are saying as they prepare to turn you and your report into the state.

DISCLAIMER:  I certainly am not telling you to ignore errors and omissions on your reports when a client discovers them and asks for corrections.   Nor am I telling you to be unethical.  But, by trying to be accommodating, you could be creating a problem for yourself where one never existed.

I can assure you that the State of IL is receiving these types of complaints.  I can’t tell you [which] lenders or AMC’s are filing these complaints.  Also, I am not saying that all lenders and AMC’s support this type of practice. 

It’s getting pretty scary out their folks.  We don’t have to make it harder on ourselves by reverting to a submissive position every time an angry client calls.  We are appraisers not pacifiers!

TJ McCARTHY AND ASSOCIATES, LTD.
Real Estate Appraisers and Consultants
7903 West 159th Street, Suite B
Tinley Park, Illinois 60477

Email: [email protected]
Phone:  (708) 614.7200      
Fax: (708) 614.7228

Potential "nuclear" threat to AMC liability could expose AMCs to large-scale mortgage litigation

Update on FDIC v. CLGX (CoreLogic -- eAppraiseIT): FDIC Reiterates Threat that Appraisers Are the Legal Agents of AMCs in a Late-Filed Brief - By Peter Christensen

The FDIC is now contending that independent contractor appraisers are the legal agents of appraisal management companies (AMCs) in both of its cases against LSI Appraisal and CoreLogic.  Based on this contention, the FDIC asserts that the AMCs should be liable for all damages attributable to the alleged negligence of their panel appraisers. 

The FDIC first asserted this argument in a brief filed in its case against Lender Processing Services and its AMC LSI Appraisal (see the update on that case here). It is now making the same argument in its case against CoreLogic, parent of the AMC formerly known as eAppraiseIT. 

In sum, the FDIC's contention is that an AMC "is vicariously 'responsible and liable' for the torts committed by the individual appraisers it retain[s] as a matter of black letter principal/agency law." 

While this is just one of many claims by the FDIC against the AMCs, this issue would have the most wide-ranging impact on the appraisal industry, if the FDIC prevails on it.

The FDIC failed to make this claim in its original complaint filed against each AMC on May 9, 2011 and also failed to make the argument in its opposition brief to each company's motion to dismiss. While the FDIC's arguments are being raised for the first time in "sur-replies" which do not have to be considered by the Court, it is still apparent that the FDIC will try to pursue liability of the AMCs on the basis that appraisers are the legal agents of AMCs (among other theories). 

As mentioned earlier this week in the update regarding the LSI Appraisal case, this is a potential "nuclear" threat to AMC liability and, if accepted by the Court, could set a precedent exposing these and similar AMCs to other large-scale mortgage litigation.

The notion of "we're not the appraiser, so we're not liable for an individual appraiser's negligence" is one of the most common frameworks under which AMCs avoid liability in cases filed by lenders and borrowers.  If the FDIC succeeds with its aggressive agency position, AMCs will face exposure to potential liability in the same situations and to the same extent as their panel appraisers.  More troublesome for AMCs, however, is the fact that unlike individual appraisers, they deliver appraisals to the same lenders in bulk and, thus,  present easier targets for actions by investors in or holders of worthless mortgage loans.  That potential risk is highlighted by the FHFA's references to several large AMCs in some of the 17 separate lawsuits that it filed against mortgage securitizers on September 2, 2011.

Like LSI Appraisal, CoreLogic argued in its motion to dismiss the FDIC's complaint that the gross negligence claim relating to faulty appraisals delivered to WaMu should be dismissed because, among other things, its AMC eAppraiseIT did not have the same duties of care that appraisers have.  This is the expected and common argument that should be made by any AMC facing claims about allegedly faulty appraisal work by individual appraisers. CoreLogic specifically argued in its reply brief:

 
 
In its sur-reply, the FDIC now for the first time against CoreLogic raises its contention about appraisers being the alleged agents of AMCs:

 

At this time, I doubt that the present motion to dismiss in this case will be decided based on the FDIC's agency argument (or the FDIC's failure to plead it in the complaint) because there are many other matters at issue.  The FDIC's lawsuit against CoreLogic will likely withstand this first round motion for other reasons, and even if the Court grants part or all of this first motion to dismiss, the Court will likely permit the FDIC to amend its complaint.  Accordingly, we will likely see more from the FDIC about the principal/agent issue in this case.

Many parties -- not only AMCs but also appraisers and lenders -- need to follow this issue closely because if, as according to the FDIC, appraisers really are the legal agents of AMCs (who are themselves the agents of lenders), there will be significant new liability challenges and defense opportunities.

Also Reference:

• Yet Another New Liability Risk for AMCs

• Update on FDIC v. LPS (LSI Appraisal): LSI Argues that AMCs Owed No Legal Duties of Care to their Clients and Appraisal Users -- FDIC Argues that Appraisers Are the Legal Agents of AMCs

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

What's Wrong with Most Indemnification Clauses in AMC Contractor Agreements? (Appraiser Law Blog)

What's Wrong with Most Indemnification Clauses in AMC Contractor Agreements? - By Peter Christensen

AMC independent contractor agreements are now receiving more attention. A key issue that many appraisers and regulators have focused on is that AMCs often use very one-sided indemnification clauses in their agreements to attempt to shift financial liability for the appraisals they manage to individual appraisers. NAR recently wrote to federal regulators expressing serious concern that such AMC clauses are interfering with appraiser independence and leading appraisers to render unduly low opinions of value because of the fear of being sacked with monetary liability if an appraisal is later deemed faulty.
 
This post is mainly about the policy reasons why unfair, one-sided indemnification clauses don't belong in AMC contractor agreements. If you're concerned, on the other hand, about the individual legal risk that such clauses create, I suggest that you read the following article on readimember.org (registration is required): Indemnity 101: Be Careful What You Promise. Also, if you're concerned about specific agreements, you can read READI's reviews there of several contractor agreements.
 
This is not an attack on AMCs. In fact, as an attorney, I work for AMCs and assist them with compliance, defense and business arrangements.  In addition, on the insurance side, LIA provides professional liability insurance and surety bonds to many AMCs. I know that a well-operated AMC, as an alternative to a lender's in-house department, with access to a quality appraiser panel actually can improve appraisal quality, reduce collateral risk and prevent a certain amount of appraiser liability.
 
But the facts are the facts when it comes to the unreasonable indemnification provisions that some AMCs are using. Leaving aside the liability risk of the individual appraiser, the fact is that unfair, one-sided clauses in practice have served no useful purpose for AMCs and may result in harm to the AMCs' lender clients. Also, as of this date, there are very few cases in which AMCs have actually tried to enforce their clauses against individual appraisers – so whatever benefit AMCs think they are receiving from having the clauses in their agreements is likely outweighed by the negative costs such as losing quality appraisers on their panels. Another reality is that much of the language in AMCs' one-sided indemnity clauses would not be enforceable in many states – so again, the net value of pushing these clauses on appraisers is further questionable. Finally, AMCs which continue to use particular language in their agreements face the risk of state discipline if regulators determine that the language violates a specific state AMC law against indemnification clauses or general appraiser independence protections.
 
Sample Indemnification Language
 
The following language exemplifies the typical indemnification language found in many AMC contractor agreements:

Appraiser shall indemnify, defend, save and hold harmless [the AMC] from and against any and all liability, claims, damages, losses, penalties, fines, judgments and any other costs, fees and expenses in any way related to any appraisal report submitted by Appraiser.

Some variation of that language is found in most, but not all, AMC contractor agreements.  A few AMCs also add the following twist to the basic language:
 

Appraiser further agrees that if a mortgage lender is required to repurchase a mortgage loan for any reason in any way related to any appraisal report submitted by Appraiser pursuant to this agreement, Appraiser shall pay [the AMC] an amount equal to the repurchase price paid by such mortgage lender to repurchase such mortgage loan. Appraiser shall also pay the reasonable attorney’s fees of [the AMC] incurred in enforcing Appraiser’s obligations under this agreement.

 State AMC Law Prohibitions against Certain Forms of Indemnification

As mentioned above, some states have enacted restrictions prohibiting AMCs from requiring appraisers to sign agreements containing certain forms of indemnification -- these laws usually prohibit the AMC from requiring an appraiser to sign an agreement which requires the appraiser to indemnify the AMC for losses or claims "arising out of the services performed by the appraisal management company ... and not the services performed by the appraiser." This language comes from Washington's AMC law, which became effective July 1, 2011. From the appraiser's point of view, it is a good start at curing some of the unfairness but not a complete fix. The strongest prohibition is found in Vermont's AMC law, which prohibits an AMC from:

Requiring an independent appraiser to enter into an agreement requiring the independent appraiser to defend, to indemnify, or to hold harmless the registrant or other third party for the development, use, or contents of a real estate appraisal.

For appraisers in Vermont, that prohibition should pretty much take care of the indemnification clause issue in AMC contractor agreements.
  
The Policy Problems
 
AMCs that use broad indemnification language similar to the samples usually justify their position by saying something like: "We're just making sure the appraiser is accountable for faulty appraisals."  Here are the problems with that position and the one-sided clauses in general:
 
1.  Appraisers already are accountable.  These indemnification clauses are not about appraiser "accountability."  An appraiser is already accountable for his or her appraisal errors regardless of whether the appraiser signs a one-sided agreement in favor of the AMC.  An appraiser is accountable without these clauses by way of:  (a) regular tort legal actions for professional negligence, (b) state discipline for USPAP or other professional violations, and (c) the very real economic consequences of losing business based on poor performance.  The indemnification clauses are about shifting financial liability from the AMC beyond these fair and better-regulated forms of accountability.
 
2.  The objectionable clauses are entirely one-sided.  If it’s reasonable to have an indemnification clause holding the appraiser “accountable” for a faulty appraisal, then it should be reasonable for the AMC to be held accountable to the appraiser and other parties and it should be reasonable for the AMC to promise to indemnify the appraiser when a faulty appraisal is the AMC’s fault.  And, when both the appraiser and AMC are at fault, it’s reasonable to expect that neither party will indemnify the other.  The reality, however, is that all liability under the language in these clauses shifts to the appraiser.  Moreover, some AMCs actually seek to limit their own potential liability for their own negligence or other misconduct to the appraiser.  Several AMCs, for example, use limitation of liability language like this (I've paraphrased and combined different companies' language into one version):

“WITH REGARD TO ANY CLAIM OR LEGAL ACTION BY APPRAISER  AGAINST [THE AMC], ITS AFFILIATES OR ANY OF THEIR EMPLOYEES, OFFICERS, DIRECTORS OR AGENTS, WHETHER BASED IN TORT, CONTRACT, OR OTHERWISE, APPRAISER'S RECOVERABLE DAMAGES SHALL BE LIMITED TO A MAXIMUM  AGGREGATE AMOUNT EQUAL TO THE FEES PAID BY [THE AMC] TO APPRAISER IN THE 12 MONTHS PRECEDING THE CLAIM."

Here are some specific examples of AMC failures for which AMCs refused to accept any liability:

• the AMC withheld from the appraiser information known to the AMC about an encroachment of a structure on a setback,
• the AMC instructed the appraiser to appraise the wrong property, and
• the AMC assigned a licensed appraiser to appraise a property for a $4.5 million federally-related loan.   

3.  Parties should be responsible for their own mess.  Interrelated with the above problem, the objectionable indemnification clauses purport to shift 100% of the liability to individual appraisers without regard to any complicity of the AMC or lender.  Lenders and AMCs are as much the cause of faulty appraisals as individual appraisers.  Lenders in general set the quality of the appraisals they receive.  AMCs represent that they select the most competent and qualified appraisers, represent that they perform QC, and charge for these services.  AMCs make these representations in their contracts with lenders, to regulators, on their websites and to the public.  They shouldn’t then be permitted to use language that purports to shift the financial responsibility for their own failures to the appraiser.

4.  The clauses are affected by unequal bargaining strength.  Given the reality of the appraisal industry, the legal liability of appraisers is better and more predictably dealt with by tort law than it is by piecemeal AMC contractor agreements in which one side possesses all the negotiating power. 

Appraisers sign the most unreasonable agreements because:

1. appraisers need to earn a living and eat,
2. many appraisers don’t understand the clauses -- in fact, the AMC personnel assigned to answer appraiser questions about the clauses almost never explain them correctly, or
3. some appraisers have nothing left to lose. 

A good example of the “nothing left to lose” scenario is the real story of the appraiser who signed one of these AMC agreements while in bankruptcy; did some "faulty" appraisals for which he, the lender and the AMC were sued over -- which were reviewed by the AMC before delivery; and then filed for bankruptcy again at about the time the AMC came after him to enforce its indemnification clause.

5.  The clauses negatively affect the quality of an AMC's appraiser panel.  All things being equal, a rational lender should have less interest in retaining an AMC that uses an unreasonable vendor agreement.  I believe that unreasonable contract language results in an overall lowering of the quality of an AMC's appraiser panel because, on average, fewer appraisers who are better trained, economically stable, and careful about reading legal verbiage choose to work for AMCs with the worst agreements.
 
6.  The economics don't support appraisers serving as financial guarantors.  Economic reality is probably the most important problem with the liability shifting that AMCs seek under the literal words of these clauses.  Holding the appraiser “accountable” sounds like no big deal and is a politically correct term, but “accountable” as intended in the one-sided agreements means that individual appraisers are serving as guarantors of their opinions of value (as of the date of appraisal, of course) and of strict fulfillment of all appraisal guidelines (whether under the control of the appraiser or not) -- all as determined in hindsight by retrospective reviews.  It also means that the appraiser is intended to be financially liable for all claimed losses that may flow from an alleged “faulty” appraisal (unpaid principal, interest, late charges, collection fees, BPO fees, etc.) plus all the costs of defending any third party claims. 

If appraisers are truly going to be held "accountable" in this sense, then the appraisal fee would need to be several thousand dollars per appraisal based on current mortgage losses of GSEs, investors and lenders blamed on “faulty” appraisals.  Even if we assume that past mortgage practices won’t repeat themselves and ignore the current losses relating to loans 2003-2008 as a measure of risk, the price for guarantying losses attributable to “faulty appraisals” as well as defending against third party claims would likely be $100-150 per appraisal on top of the appraisal fee, based on the LTV and credit of the borrower (the current “insured warranties” offered by some AMCs at $10-$20 per appraisal don’t cover anything close to the liability shifting contemplated in the one-sided indemnification agreements).  No AMCs as willing to pay appraisers for the price of liability risk that the literal application of these clauses seeks to shift.
 
7.  The bottom line.  Perhaps the bottom line is that a $200-$400 appraisal can't and shouldn’t be relied on to guaranty repayment of a $1 million loan if someone later deems the appraisal “faulty.”  Every appraiser performing valuations will have appraisals that can be deemed "faulty."  Good appraisers should be selected and used because they are trusted as competent, reliable and honest and render opinions of value that are on average accurate and reliable and within a range of acceptable errors.  They should not be employed as financial guarantors of value -- unless AMCs or lenders are willing to pay for the price of shifting that risk.

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

NAR Seeks to Bar AMC Indemnification Clauses

NAR President Ron Phipps sent the attached letter to heads of government agencies today.

Here’s an excerpt :

Appraisers provide an independent and impartial analysis of the market, and a credible opinion of the value of real property. This analysis is a critical component of the mortgage transaction and, in recent months, has become the subject of unnecessary pressure. The mounting use of indemnification clauses by AMCs may be interfering with the appraiser’s independence and objectivity. In many cases, appraisers are asked to sign contracts that include language to indemnify and hold harmless the AMC against any suit, threat, or claim on any work product or service provided as part of the contract agreement. In some instances, the appraiser is even required to indemnify the lender and the AMC for amounts equal to their costs in repurchasing a mortgage loan, regardless of any proof of culpability on the part of the appraiser. 

Download Letter to Regulators on Appraiser Indemnification FINAL 08112011

If you are not comfortable downloading the attached pdf, there is an online version at this link: http://appraiseractive.blogspot.com/2011/08/nar-encourages-bar-of-amc.html

Thanks to Frank Gregoire for providing the link -

Francois (Frank) K. Gregoire IFA RAA
Gregoire & Gregoire, Inc.
Realtor - Appraiser
Office 727-344-3393
Mobile 727-420-3804
Fax 727-344-3395
[email protected]
http://fl.living.net/Realtor/gregoire
http://appraiseractive.blogspot.com

Appraiser Law Blog - "FDIC undoubtedly continues to be the biggest source of appraisal-related liability claims"

Appraiser Law Blog: Source:

In December, we offered 11 predictions for AMC liability risks in 2011. Three of the predictions were:

#1 -- Several AMCs would be sued by the FDIC,

#5 -- Some AMCs would see their "reps and warrants" come back to bite them, and

#11 -- The FDIC would continue to be the single biggest source of appraisal-related claims.

See 11 Predictions for AMC Liability Risks in 2011. These came true in the last two weeks.

The lawsuits described below against CoreLogic and LSI Appraisal will likely also lead #3 to occur: a few AMCs will endure liability aftershocks relating to litigation by the purchasers of mortgage backed securities. Purchasers of WaMu packaged mortgage securities -- and likely MBS from other sources -- will almost certainly pursue their own claims against these AMCs. We may also see consumer class actions attempting to emulate the FDIC actions.

Click here for the complete article