Monday, November 16, 2009

Rotten Reviews

Appraisal reviews and "forensic" appraisals are hot items at industry conferences. AMCs and other appraisal vendors are selling thousands of reviews and retrospective appraisals to mortgage insurance companies, lender "loss mitigation" departments, the FDIC and even the FBI. Those reviews and retrospective appraisals are then being used, among other things, to make claims against the original appraisers.

Mortgage insurance companies, for example, are ordering review appraisals in connection with claims by lenders for coverage of their losses on foreclosed loans. The reason for this is that the mortgage insurance contracts often contain representations by the lender obtaining the mortgage insurance that the appraisals for insured loans will comply with regulatory guidelines and/or USPAP. The representations probably seemed unimportant when the lender obtained the policy and are not material to whether a loan goes into default. However, some mortgage insurance companies are now taking advantage of these clauses by ordering appraisal reviews in bulk and then using those reviews as the basis for denying claims. When a mortgage insurance claim is denied on this basis, we then often see the lender attempt to turn around and make a claim against the original appraiser.

We're seeing similar uses of review appraisals by lender "loss mitigation" departments and the FDIC. They're using appraisal reviews to make claims against appraisers relating to appraisals from the peak of the mortgage bubble.

The problem with all of this is that the reviews and "forensic" appraisals used for these purposes are among the most biased appraisal work we see. In many cases, there is more wrong with the freshly minted appraisal review than with the underlying appraisal, which often dates back 4 or 5 years. The reasons for this seem pretty obvious:

First, I believe that many of the firms hired to supply review and forensic appraisals know and adhere to the agenda -- their clients benefit when they find a reason to say the underlying appraisal is flawed or a reason to allege the value was overstated. I think there is pressure on them to find errors and if they can't, they know their work will dry up. Accordingly, we've seen review appraisals for "loss mitigation" stretching the facts to allege errors -- things like using "crack dens" or other blighted properties as comparables or misstating a subject property's characteristics in order to use lower value comparables. The appraisers have lost their objectivity and become advocates. Even if not intentionally biased, however, the retrospective reviews we see are widely unreliable because they usually fail to factor out: (1) deterioration of the property, (2) information acquired after the effective date of the original appraisal, and (3) the dramatic effect of market decline.

Second, in many cases, I think the review appraisers selected by some vendors in this area are less qualified that the original appraisers. The review appraisers often lack the same level of geographic competence as the original appraisers. (Sometimes, of course, the review appraisers are not licensed or certified in the subject property's state.) In addition, some appraisal vendors/users in the "loss mitigation" area are paying small fees for review work, causing rushed work, and using less experienced appraisers. Showing how little some lenders care about the quality of the review work being used for this purpose, we've seen a lender submit a complaint using a review by an appraiser on its own ineligible list and against whom the lender has filed a disciplinary complaint.

Third, review appraisals in this area of use are subject to less transparency and less accountability. The HVCC, of course, does not apply to mortgage insurers and lenders in connection with review appraisals for claims denial or loss mitigation, and fewer laws, rules and regulations in general govern review work. Also, the names and license numbers of review appraisers are often blacked out by the lenders and mortgage insurers when they use review appraisals against other parties. (Appraisers doing review work, however, should be aware that we are starting to see more appraisal reviews being investigated by state boards.)

What's the advice for the good appraiser? Be wary when someone calls you to discuss an old report. These days many of the parties contacting appraisers about prior work are: mortgage insurance company personnel, "loss mitigation" personnel working for lenders seeking to force a re-purchase by the originating lender, or third-party companies investigating alleged appraisal issues. These parties aren't your clients and appraisers need to be guarded in their discussions with them. For one thing, these parties very likely are working against the best interest of your client and, aside from that, you need to remain obedient to your duty of confidentiality under USPAP.