In December, we offered 11 predictions for AMC liability risks in 2011. Three of the predictions were: #1 -- several AMCs would be sued by the FDIC, #5 -- some AMCs would see their "reps and warrants" come back to bite them, and #11 -- the FDIC would continue to be the single biggest source of appraisal-related claims. See 11 Predictions for AMC Liability Risks in 2011. These came true in the last two weeks.
The lawsuits described below against CoreLogic and LSI Appraisal will likely also lead #3 to occur: a few AMCs will endure liability aftershocks relating to litigation by the purchasers of mortgage backed securities. Purchasers of WaMu packaged mortgage securities -- and likely MBS from other sources -- will almost certainly pursue their own claims against these AMCs. We may also see consumer class actions attempting to emulate the FDIC actions.
On May 9, 2011, the FDIC filed a lawsuit in U.S. District Court (C.D. Cal.) against CoreLogic and various affiliated companies including CoreLogic Valuation Services, LLC, f/k/a eAppraiseIT, LLC (" eAppraiseIT"). In its complaint, the FDIC alleges that eAppraiseIT supplied potentially thousands of improper appraisals and that eAppraiseIT was grossly negligent in the provision of appraisal services in 2006 and 2007. According to the complaint, the FDIC has sampled 259 appraisals out of the thousands at issue and alleges that 194 (or 75%) of them "contain multiple egregious violations of USPAP." Keep in mind that many so-called "forensic reviews" obtained by entities making appraisal liability claims, including the FDIC, are often pieces of advocacy, riddled with their own problems and supplied by other AMCs. Nevertheless, just based on those 194 allegedly flawed appraisals, the FDIC says that eAppraiseIT is responsible for more than $129 million in losses that WaMu allegedly suffered -- presumably, the damages sought by the FDIC could be much higher when the FDIC reviews more appraisals. A few sample allegations from the FDIC's complaint are attached to the right.
The FDIC's allegations appear closely related to the issues in the 2007 case filed in New York state court by then-NY Attorney General Cuomo against eAppraiseIT. That case is still being litigated -- most recently, the New York court denied a motion for summary judgment by eAppraiseIT as discussed in this prior post here.
The FDIC's Lawsuit against LSI Appraisal and Lender Processing Services
A sample of the FDIC's allegations in the complaint against LSI Appraisals is attached above. The full text of the complaint is available here on appraiserlaw.com.
AMC Reps, Warrants and Indemnification
The FDIC also Filed Lawsuits against an Insurance Carrier and Another Individual Appraiser in the Same Court
The FDIC also filed another lawsuit against an individual appraiser in the same Santa Ana federal courthouse on May 2, 2011 -- showing that while the FDIC has moved up the chain-of-command in the appraisal industry by suing two of the largest AMCs and insurance carriers, it will continue to sue the little guy as well.
General Remarks about Claims against AMCs and Appraisers
As noted elsewhere on this blog, while we report on lawsuits affecting appraisers and AMCs, I don't think that anyone in the appraisal industry should relish in the liability of other parties, even large AMCs. This litigation will likely hurt all appraisers. The lawsuit may unfortunately further diminish the perceived value of appraiser-performed valuations in general and subject unrelated appraisers to even more litigation by other parties (even if the appraisers had nothing to do with these AMCs). In addition, no one -- whether it's a full-fee independent appraiser, an AMC panel appraiser or an AMC itself -- is paid an appraisal fee high enough to justify the treatment of any opinion of value as a guarantee of value or as alternative mortgage insurance. The quality standards during the mortgage boom years were set by the lenders and their regulators -- lenders got the quality they ordered under the supervision of their regulators, including the OTS and FDIC. Yet, now, these same lenders and the FDIC are looking at those appraisals as a way to recoup their losses resulting from bad lending and falling real estate prices.