Saturday, November 5, 2011

REALTOR Magazine Article about AMC Indemnification

The National Association of Realtors® has published a short article about indemnification in AMC/appraiser contractor agreements in the November issue of REALTOR Magazine.  I wrote the note.  Appraisers should know that NAR has called for a ban on indemnification clauses in AMC contractor agreements and has written to federal regulators in support of that position.

I do not see this as an "appraiser versus AMC" matter -- indemnification relating to appraisals in general, whether the indemnification is part of an AMC's own contract with a lender or in an appraiser's contractor agreement with an AMC, is an industry problem.  We keep on the issue because it is one of the factors moving appraisals toward being treated essentially as financial guaranties by the appraisers and AMCs who deliver them.  No one in the industry, whether an AMC or an individual appraiser, can afford that liability -- lenders are not about to pay you for accepting that risk.  The cost of liability stemming from indemnification promises can easily exceed the fees generated by the work -- for proof of that, we only need to look at the damages being demanded by the FDIC in its claim based on the indemnification clause found in eAppraiseIT's contract with WaMu.  And, that indemnification language is not nearly as one-sided as the language that many AMCs are now agreeing to in current contracts with lenders and that appraisers are agreeing to in their contracts with AMCs.

Consider this: in Australia, valuers -- as appraisers are called there -- are currently paying as much as 10% of their gross appraisal revenue for professional liability insurance.  That means residential valuers there sometimes pay $20,000 per year for insurance and, moreover, valuers typically carry deductibles of $10k-$50k per claim.  Australia doesn't suffer from anywhere near the mortgage problems we face in the U.S., but valuers there still have tremendous claim losses based on allegedly deficient valuations.  Their liability crisis and resulting insurance rates don't stem from indemnification exactly -- but they do stem from appraisals being viewed and treated as de facto guaranties of value.  American appraisers and AMCs shouldn't want the tracks of their liability train to head in that direction.

Here is a link to the on-line version of the article in REALTOR Magazine: Indemnification Woes