Here's a typical recent claim scenario: a homeowner who purchased his property at the height of the market in 2006 wants to refinance at the current low rates. The homeowner is trying to consolidate a conventional first loan with a home equity loan. The homeowner visits one of the remaining large lenders and tells the loan officer what he thinks his home is worth -- the homeowner's estimate is higher than what the homeowner paid in 2006, but the homeowner justifies his number because of "upgrades" to the home since purchasing it. This homeowner might also suffer from the common delusion that while some people's homes have declined in value, his home has not.
The loan officer orders an appraisal from the lender's affiliate/subsidiary AMC. The lender charges the borrower $575 for the "appraisal fee." The homeowner is shocked by the fee but doesn't know that the appraiser only receives part of it. In any event, the appraiser does a good job and accurately reports the value of the property -- in this case, the reported value is about 20% less than the homeowner paid in 2006. The loan officer informs the homeowner that the loan will not be made because the value is too low. He provides the appraisal report to the homeowner. When the homeowner complains about the appraisal being low, the loan officer tells the homeowner to call or write to the appraiser and stops responding to any calls from the homeowner because he has other loans to pursue.
The next thing we see is a demand letter from a lawyer for the homeowner threatening to sue the appraiser and/or report him to the appraiser's state board unless the appraiser tells the lender his report was erroneous and raises the value to the level needed for the homeowner's desired loan. The lawyer threatens that if the homeowner does not get the loan, he will sue the appraiser for $80,000 in "extra interest" and also to sue the appraiser for punitive damages for "conspiring" with the lender to deny the loan. Please understand, we see claims like this for what they are: frivolous.
This month, claims that appraisals are too low have made up about 50% of the claims reported to us. In addition to the scenario above, the claims are taking several forms:
- Immediate complaints filed with appraisal boards by borrowers and real estate agents upon receipt of an appraisal containing a value deemed too low. These board complaints are often brief, saying something like the appraisal is too low because prior appraisals -- from before the downturn -- were higher. We've also seen complaints that alleged the appraisal was too low because photographs in the report were dim or the appraisal didn't take into consideration certain fixtures.
- Attorney letters arguing that the appraisal should be higher and contending that different comparables support a higher value -- usually the "comparables" are older sales closer to the peak or even just listings.
- Letters, emails and telephone calls from borrowers accusing appraisers of conspiring with lenders to deny loans.
- Letters written directly to us as the appraiser's E&O provider telling us that unless we arrange for the appraiser to change his appraisal, the appraiser will be sued.
- And, of course, frivolous lawsuits filed in court.
Another frustrating aspect of the new blame being tossed at appraisers is that the lenders in many cases just seem to be using a low appraisal as a convenient excuse for why a loan cannot be made. Loan denials don't always come down only to value. Because so many people are struggling with their finances, there are often credit problems and other loan underwriting issues. Yet, it sometimes just seems easier for a loan officer to tell the borrower that the only reason for denial is the appraised value and point the borrower in the direction of the appraiser.
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