Wednesday, November 19, 2008

Form Letter Board Complaints by a National Lender

We've observed a new pattern by one 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.

I think the better practice for lenders to deal with alleged appraisal performance problems is for a knowledgeable in-house appraiser (either at the lender or its AMC) 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 then 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 often 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.

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Tuesday, November 18, 2008

The Riskiest States for Appraisers in 2008

Our company LIA insures 25,000+ appraisers in the U.S. The claims we receive give us a very good indication of the riskiest states for appraisers in terms of legal claims and disciplinary complaints.

Legal Claims. Based on our claims in 2008, the three states with the most legal claims against appraisers (i.e., lawsuits and threatened lawsuits concerning appraisals) are:

1. Florida (most legal claims)
2. Michigan
3. Arizona

The most surprising thing here is that California is not in the top three.

Disciplinary Complaints. The three states with the most disciplinary complaints reported (i.e., complaints investigated by the agency in each state with responsibility for appraiser discipline) are:

1. Michigan (most complaints)
2. North Carolina
3. Oregon

Based on what you read in the papers, I would have expected other states to be in the top three. Given their relatively smaller populations, North Carolina and Oregon are surprises to me.

Overall Scariest Place to Appraise Property: Michigan.

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Monday, November 10, 2008

Nationstar Mortgage -- Beware of a New Claim Tactic

We previously commented that Nationstar Mortgage is the lender who currently asserts the most claims against appraisers. In the last week, we have observed a new tactic being employed by Nationstar and feel that appraisers need to be aware of it to protect themselves.

A typical claim by Nationstar against an appraiser begins with Nationstar’s collection personnel contacting the targeted appraiser by telephone or email. Nationstar may then forward the appraiser a letter accusing the appraiser of “gross negligence” in performing an appraisal for one of its defaulted loans. The company threatens the appraiser with legal action or a disciplinary complaint unless the appraiser resolves Nationstar’s claim by paying a substantial sum of money, sometimes more than $100,000.

Nationstar’s apparent new tactic is to send a short agreement to the appraiser entitled “Errors and Omissions Claims Submission Form.” The form contains the following statement: “Based on additional review by Nationstar Mortgage it was determined that the appraisal contained some deficiencies and was completed in a negligent manner which would warrant a legitimate appraisal claim.” Nationstar’s collection personnel demand that the appraiser sign and return the form.

Regardless of his or her insurance coverage, no appraiser being targeted by Nationstar should sign this form or anything similar from Nationstar. (Indeed, no appraiser should sign anything like it for any lender making a claim against them without first consulting with their E&O insurer or an attorney.) Though this form contains a statement that “this is not an admission of guilt,” the form still appears intended by Nationstar to elicit the appraiser’s agreement that his or her appraisal was negligent. No appraiser should agree to this – particularly, when in our experience, almost all appraisals rendered for loans by Nationstar or other lenders making claims are defensible as of their effective date. Moreover, we’ve seen Nationstar pursue a claim against an appraiser based on a forged appraisal. Certainly, an appraiser should not agree that a forged appraisal would “warrant a legitimate appraisal claim” as stated in the form.

The bottom line is that an appraiser should never agree with Nationstar, or any party, that his or her appraisal was deficient or negligent (doing so could even jeopardize insurance coverage for the claim).

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How Will the Bailout Affect Claims Against Appraisers?

The number of legal claims against appraisers – both residential and commercial – has increased about 100% in the last two years. This increase results largely from high foreclosure rates relating to loans made in 2005-2007 combined with lender and borrower decisions to blame appraisers for their losses and to seek compensation by filing claims. For the record: we believe that the vast majority of the claims we see against appraisers arising out of the mortgage crisis are without merit – typically, the claims are filed by lenders who ignored responsible lending criteria or by parties who were not clients of the appraiser and the subject appraisal is usually defensible as of the time it was performed. However, even though most claims can be defended, appraisers are still left with the problem of too many claims and lawsuits. Just defending them consumes enormous time and expense and, of course, causes stress and anxiety for appraisers.

The federal bailout will have an important impact on whether claims against appraisers increase or decrease. Our simple hope is that the bailout will decrease foreclosures and defaults and thus spare appraisers from some of the claims that would otherwise have been filed. Our fear, however, is that parts of the bailout could involve organized/institutionalized efforts to recover loan losses from appraisers and other professionals (as occurred under the RTC during the S&L crisis). It is too early to tell what will happen. Our current observations are discussed below.

TARP. The Treasury Department’s $700 billion Troubled Assets Relief Program (TARP) became law October 3, 2008. Prior to enactment, TARP was sold to the public and Congress on the basis that it would be a mechanism for the Treasury to purchase troubled mortgages and mortgage backed securities to rescue financial institutions and bring relief to struggling borrowers. The Treasury Department, however, immediately took TARP in a different direction after enactment by allotting the first $250 billion dollars of the program to purchase equity interests in banks. While these investments may stabilize the chosen lenders, they will do nothing to prevent foreclosures or have the effect of decreasing claims against appraisers.

The Treasury Department states that it is still working on planned programs to actually purchase troubled mortgage debt and that it is still in the process of selecting the asset managers who will oversee the management of the debt it purchases. As this process occurs we, are reading through documents that become available to discern if the organized pursuit of legal claims will be part of the direction given to the asset managers. Our obvious hope is that there will be no such direction in the program and that the emphasis will be on simply taking the debt off the books of lenders and trying to work with borrowers to prevent foreclosures and defaults.

FDIC. We have seen the FDIC take over a number of banks in recent months. The most notable of these seizures were the FDIC’s takeover over of Washington Mutual and its seizure of Indymac. Thus far, we have not seen any overt sign that the FDIC is intent on pursuing organized litigation against appraisers or other third parties relating to loan losses by these lenders. However, the backdrop for such an effort (which, at its worst, would resemble what the RTC tried to do) does exist. For example, in the case of WaMu, when the FDIC sold WaMu’s banking/mortgage assets to JP Morgan, the FDIC retained – as receiver for WaMu – all rights, actions and claims against third parties “whose action or inaction may be related to any loss . . . incurred by the Failed Bank.” This provision appears to be standard in the FDIC’s agreements when it sells loan assets from failed banks and means that the FDIC is retaining the right to pursue claims against professionals like appraisers. At the same time, the FDIC is currently seeking bids from law firms desiring to provide legal services to the FDIC for, among many other things, the purpose of pursuing these types of claims. We will, of course, be monitoring such movements for any sign that the FDIC has begun to pursue coordinated legal actions designed to recover losses from appraisers. We are hopeful that what the FDIC is really trying to carve out and pursue here are claims against bigger players who actually caused harm to banks (such as their former officers and directors, their legal and accounting advisors, and rating agencies).

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