Wednesday, October 6, 2010

An Early Report on Claims Against Appraisers in 2010

This is an early report about claims against appraisers in 2010.

The good news is that the professional liability risk to appraisers remains manageable with prudent loss prevention, despite a large number of claims stemming from the mortgage crisis.  The bad news is that claims against appraisers in all forms -- lawsuits, demand letters for money and disciplinary complaints -- are still at the same record levels where they have been for the last four years.  Most claims continue to relate to appraisals performed in 2004-2007, though we are seeing many new frivolous claims filed by borrowers alleging that more current appraisals are "too low."  The main driving forces behind claims persist: millions of residential and commercial loans in default, desperate borrowers and lenders, billions of dollars of mortgage repurchase demands, and the growing FDIC specter. 
So far in 2010, the three entities making the most claims against appraisers are:
the FDIC, JP Morgan Chase and Flagstar Bank.  The FDIC is currently the single biggest threat to appraisers.  Some leading professional liability insurers currently exclude or are moving to exclude coverage for FDIC claims in their policies -- the reason is that the FDIC is using its federal influence to change the rules with respect to appraiser liability and is tilting the playing field in its favor, but more often than not, the FDIC will only pursue claims if an insurance policy exists to cover its demands.   As to JP Morgan Chase, we have recently seen a change in direction from them as far as how they handle some appraiser "performance problems."  We'll report on that soon for appraisers registered at readimember.org and also report on the basic strategies that appraisers can follow to minimize their liability risk from appraisal work in the 2004-2007 bubble years as well as future work.
It's my belief that one of the only factors that has kept the number of claims against appraisers in check is that mortgage owners and their servicers are in such organizational and legal disarray that they are simply unable to follow through on claims that they would otherwise assert.  Evidence of their massive disarray comes from the recent media attention focused on the false foreclosure documentation that many mortgage servicers have been proliferating in foreclosure cases.  If a lender can't find a loan file or can't show a chain of loan ownership, it can't bring a claim against an appraiser either.
We do expect -- at least, we hope -- that claim levels will decrease as we get further from the 2004-2007 bubble years, but we also expect that the “new normal” level of claims against appraisers may stay permanently higher than historical patterns.  The reasons we believe this are: 
  • Borrowers and other non-clients have now been trained by lawyers, regulators, lawmakers and media to expect that appraisers should be liable to them for alleged appraisal issues -- despite the fact that the appraiser’s client in most such cases is the lender.
  • The concepts of scope of work, intended use and intended users have eroded and appraisers are not using them as effectively as they should to limit their liability exposure to third parties.
  • A sub-industry in valuation has developed around review and "forensic" appraisals supplied for the purpose of attacking origination appraisals.
  • Lenders and appraisal management companies are making more efforts to shift liability to appraisers through contractual provisions and litigation.
  • The FDIC has many more years in which to pursue claims because of the statutory extensions of time in which it may file tort and contract claims relating to failed banks under its supervision.
  • New risks for appraisers have been created by the Dodd-Frank Act, including mandatory reporting of perceived appraiser performance issues to state boards and increased power granted to the FDIC.  State AMC laws also present new factors which may increase appraiser liability risks as well.
We will have a full report at the end of 2010.