Tuesday, April 20, 2010

The Single Biggest Liability Threat to Appraisers: the FDIC

The FDIC has taken over more than 80 failed banks since January 1, 2008. When the FDIC takes over a bank, it starts considering potential claims against parties from whom it may be able to recoup some of the failed bank's losses. The FDIC has retained private law firms for the specific purpose of pursuing such claims. With so many attorneys engaged, the FDIC publishes a handbook for them.

Unfortunately, we've started to see demand letters and lawsuits against appraisers from the FDIC's private law firm attorneys. An edited example of an FDIC demand letter is attached to the left. In the letter, the FDIC's attorney accuses the appraiser of overvaluing a property by about 20% in 2005. Apparently, the borrower went into default on the very first payment, as quite typically occurred with the poorly underwritten loans extended by many failed banks. Now, fours years later, the FDIC's attorney is blaming the appraiser for the bank's entire loss and demanding that the appraiser pay the full amount of the unpaid loan, which is several hundred thousand dollars. This is very typical of the demands we see and there is always a lot more to the story of the bank's loss. (We believe claims like this are highly defensible and defend them accordingly. It's frustrating that parties like the FDIC essentially contend that appraisals should serve as free mortgage insurance.)