Reducing the Risk of Borrower Claims

Borrowers are currently the most common source of claims against residential appraisers. Regardless of the fact that they are not the intended users identified in almost all reports, borrowers are filing a majority of the lawsuits and demand letters we see against residential appraisers. This article discusses common borrower claims and suggests new approaches that appraisers might consider on how to decrease the risk . . .


[A complete and updated version of this article is available to LIA insureds and READI members at readimember.org.  READI is the Real Estate Advisors Defense Institute, created by LIA to protect appraisers, advocate on their behalf and provide straightforward information about the legal issues that affect them.  You can read more about READI at readimember.org.] 
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An Update on BofA's Suit Against MGIC's "Rotten Reviews"

This is an update for those interested in following Bank of America's subsidiaries' lawsuit against Mortgage Guaranty Insurance Corporation (MGIC) relating, in large part, to rotten review appraisals. Bank of America filed the lawsuit in San Francisco County Superior Court (i.e., a state court). MGIC's first filing in the case was to remove the case to federal court. Accordingly, for now, the case will be litigated in the United States District Court for the Northern District of California, Case No. C10-0233JL. At the same time, MGIC requested and received an extension of 30 days to respond to Bank of America's complaint. It's quite likely that MGIC may challenge Bank of America's ability to sue in court on the basis that the allegations in the complaint are subject to mandatory arbitration under the parties' insurance contract. Bank of America has tried to avoid that arbitration requirement by positioning its claims as only seeking "declaratory relief" regarding an interpretation of the insurance policy and by not seeking damages for the breaches alleged against MGIC. It would be a shame to see the review appraisal practices employed by mortgage insurers swept away into confidential arbitration. I'm hoping the case stays in court.
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The Surest Way for Commercial Appraisers to Be Sued for Negligence

Commercial appraisers are more likely than residential appraisers to be in the position of considering whether to sue a client for unpaid appraisal fees because their fees for a single engagement are higher, sometimes $10,000 or more. Residential appraisers, however, occasionally also face the decision when unpaid fees have accumulated with a single client. When it's only a single unpaid residential fee, most residential appraisers seem to let it go but never accept another assignment from that party.

The question of whether to sue a client for unpaid fees should be evaluated carefully. Suing a client for unpaid fees often results in . . .


[A complete and updated version of this article is available to LIA insureds and READI members at readimember.org.  READI is the Real Estate Advisors Defense Institute, created by LIA to protect appraisers, advocate on their behalf and provide straightforward information about the legal issues that affect them.  You can read more about READI at readimember.org.]
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Bank of America Sues MGIC over "Rotten Reviews"

In November, Appraiser Law Blog reported about "rotten reviews" being used by mortgage insurance companies to deny mortgage insurance claims by lenders. The reason I wrote about the issue was that in some cases, mortgage insurers' and other parties' usage of rotten review appraisals is leading to unjustified claims against individual appraisers. It's a nightmare -- emotionally and professionally -- for an appraiser to become embroiled in such a lawsuit, a nightmare made worse because it results from large companies treating appraisers as pawns.

As a refresher, the practice being employed by some mortgage insurers is to obtain review appraisals in connection with claims by lenders for their losses on foreclosed loans that have mortgage insurance in place. The review appraisals are obtained for the purpose of finding grounds on which to claim that the appraisal violated USPAP or appraisal guidelines of Fannie Mae or Freddie Mac. The mortgage insurers then use a negative review to deny the lender's insurance claim on the basis that the lender misrepresented the loan to the mortgage insurer and/or otherwise did not comply with the master policy issued by the mortgage insurer. We're talking about minor disagreements in value between a full original appraisal and a retroactive desktop review being used to deny a mortgage claim. We've seen differences of as little as 12% being asserted by a mortgage insurer to rescind a policy.

I suspect that many of the reviews are being performed by out-of-state reviewers or by reviewers with less experience than the original appraiser. I also suspect that some of the companies providing the reviews know the mortgage insurers' desired agenda and that the reviews suffer from that bias, as well as the bias of post-mortgage crisis hindsight.

According to the mortgage insurers' own corporate reports, they are denying 20-30% of the claims they receive. However, I think that this percentage may, in fact, be understating the number of claims they deny to private lenders. The reason for this suspicion is that MGIC, in particular, has sold a majority of its insurance to cover loans sold to Fannie Mae -- I think there's a strong likelihood that paying those claims may be favored over others. Indeed, in MGIC's most recent 10-Q SEC filing, it disclosed the possible jeopardy that the company would face if Fannie Mae decided to revoke MGIC's designation as an eligible mortgage insurer which is already on shaky ground (sounds a bit like being "blacklisted" as an appraiser but on a bigger scale). The mortgage insurers attempt to explain their new claims denial tactic in their SEC filings by essentially stating that they just discovered mortgage underwriting was sloppy during the peak of the mortgage boom -- if we are to believe them, these mortgage industry experts were the last to realize this fact.

Well, it's not just the affected appraisers who are unhappy now. On December 17, Bank of America's mortgage lending and servicing subsidiaries Countrywide Home Loans and BAC Home Loans Servicing filed a lawsuit against Mortgage Guaranty Insurance Company (MGIC), one of the biggest U.S. mortgage insurers. Filed in San Francisco Superior Court, BAC's complaint alleges, among other things, that MGIC is using rotten review appraisals to deny Countrywide's and BAC's mortgage insurance claims. The lawsuit is a big enough problem for MGIC that it felt required to disclose the lawsuit as a material corporate event in a recent 8-K SEC filing, causing its stock price to plummet 10%. Some of the relevant allegations in the lawsuit are contained in the page displayed to the right. Bank of America's subsidiaries allege point blank "the review appraisals lack credibility or violate the Uniform Standards of Appraisal Practice ('USPAP')."

There's a strong chance that the suit may not go anywhere other than straight to arbitration because most insurance policies of this type contain mandatory arbitration clauses to avoid public litigation. Nevertheless, the lawsuit is good news for individual appraisers who don't do review work for mortgage insurers because just the filing of a lawsuit like this further exposes the unfair practice and helps put a stop to it. It's bad news, of course, for the few appraisers who perform this review work -- they stand a good chance of being dragged into depositions or state disciplinary proceedings. Aside from that, one does wonder why any lender would ever again pay for mortgage insurance from one of these companies?

If this issue has affected you as an appraiser or as a lender, please contact me to discuss it confidentially.

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Should I Sue the Appraiser?

We receive a significant number of hits on this blog from mortgage borrowers thinking about suing appraisers. It's usually one of two things: the borrower feels that the appraiser valued a property too low or too high.

Borrowers usually start their inquiries with Google or Yahoo searches for something like: "Can I sue the appraiser?"  That's not quite the right question. The more relevant question for the borrower is: "Should I sue the appraiser?" The short answer is "most likely, no."

As a lawyer who has seen hundreds of these kinds of situations, it's my opinion that suing an appraiser is false hope for borrowers. Suing an appraiser generally wastes the borrower's time, emotional energy and money -- not to mention that it truly causes suffering to the appraiser. Here are several of the key reasons why suing an appraiser is a bad move for borrowers:

1. The borrower who wants to make a claim was almost always not the appraiser's client or intended user identified in the appraisal report. The appraiser works for the lender. This simple fact is a roadblock to many claims, though I'm certainly aware that the principle has eroded some in certain jurisdictions. (Borrowers can determine who the appraiser's client was by looking at the data box entitled "Lender/Client" near the top of the first page of standard appraisal forms.)

2. Judges and juries recognize that alleged real estate losses are more likely the result of the declining real estate market and not legally caused by the appraisal. If the claim is about a foreclosed loan, courts recognize that the appraiser was not the legal cause of the borrower's inability to repay borrowed money. If the claim is about an appraisal being "too low," courts recognize the appraisal as being on the mark and attribute the disappointing value to the plummeting price of real estate.

3. Most claims by borrowers are unsuccessful.

4. A borrower who loses a lawsuit against an appraiser can be held financially liable for the court costs incurred by the appraiser. These costs can be several thousand dollars and, in some cases, much more.

5. Filing a lawsuit can negatively affect an individual's ability to obtain a mortgage loan or employment in the future.

6. If a borrower provided false information when applying for the loan (such as about income or occupancy), the borrower's fraud will likely be exposed during the lawsuit. Mortgage fraud is a felony.

7. The borrower's legal counsel will likely not have the same level of expertise with regard to appraisal issues as the appraiser's defense counsel.

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