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  #21  
Old 03-26-2012, 11:43 AM
George Hatch's Avatar
George Hatch George Hatch is offline
 
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On the face of it the case in question appears to consist of an appraiser not completing an inspection, relying on an undisclosed assumption about the subject's attributes, and then falsely certifying otherwise in the report. We're talking about Honesty 101 here.

I've seen commercial appraisal reports where the appraiser should get sued and I don't recall ever suggesting otherwise. Where the animosity between residential and commercial appraisers has popped up here in the past relates to the lack of sympathy among the commercial appraisers for the drastic reduction of the loan broker control over appraisers brought about by the HVCC. That criticism has/had nothing to do with being critical of the appraisers and everything to do with being contemptuous of these loan originators and their conflict of interest.

This appraiser lying about their SOW in this appraisal is bad, but I didn't see any reference in the summary indicating that they did it for any reason other than being lazy. Based on the summary it doesn't look like they were knowingly advocating for their client, which was our primary criticism of the broker select system.
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Old 03-26-2012, 11:57 AM
CBBoston CBBoston is offline
 
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While some of you might not have been around for the S&L debacle back in the 80s, all kinds of actions against appraisers were pursued. Many successfully. In this last go round I'm surprised its taken this long. Just as on the residential side there was plenty of pressure being placed on commercial appraisers to "make the numbers." We had several clients pushing for unreasonable values. Oddly enough they never came back to us after we didn't play the game. USPAP issues will be the first types of cases because they will be easier to prove. I've seen lots of appraisals and most are full of them if not by commission then by simply sloppiness. The challanges to wildly over optimistic assumptions (often pushed for by underwriters) are sure to follow.
  #23  
Old 03-26-2012, 12:05 PM
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Vernon Martin Vernon Martin is offline
 
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Quote:
Originally Posted by George Hatch View Post
I've seen commercial appraisal reports where the appraiser should get sued and I don't recall ever suggesting otherwise.
I didn't mean to suggest that there aren't plenty of commercial appraisers worthy of condemnation. Because most of my work is for commercial wholesale lenders, I get to read biased commercial appraisal reports almost every week, and yes, there's always a mortgage broker involved.

Still, I hesitate to advocate lawsuits against appraisers, only if just because there are bound to be some unfair lawsuits.

In this case, the appraisers relied on misrepresentations made by the developer; they were possibly duped. This happens a lot, and not just to inexperienced appraisers. I've seen some reputable appraisers get tricked by developers, too. Most recently, I had a client come back to me about an appraisal I did in the Dominican Republic a year before, saying that a national firm starting with the letter C appraised the property for many times more than I did and stated that there were no protected mangroves on the waterfront. The client sent me the report, and it was apparent from the photos that the appraiser was flown by helicopter over the wrong property and never got out of the helicopter. Luckily I still had one photo of the mangroves. Yes, I've had developers try to take me to the wrong property before.

Last edited by Vernon Martin : 03-26-2012 at 01:44 PM.
  #24  
Old 03-28-2012, 11:02 AM
Privateer Privateer is offline
 
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Quote:
Originally Posted by David Wimpelberg View Post
If the above is true, fraud and negligence is involved. I see no reason for any CG to be concerned based on the above.
Quote:
Originally Posted by George Hatch View Post
On the face of it the case in question appears to consist of an appraiser not completing an inspection, relying on an undisclosed assumption about the subject's attributes, and then falsely certifying otherwise in the report. We're talking about Honesty 101 here.
David and George,

I agree that the specific reasons, as alleged by the FDIC, that the two appraisers were sued in this case should not cause too much concern for most CGs acting with reasonable diligence and honesty. The case is important, however, because it may signal that the FDIC will be pursuing more commercial cases and most of those cases, if filed, would involve less clear alleged errors based on the subpoenas and reports I have seen. Aside from that, I wrote a more detailed article about the lawsuit for our insureds, because there are lessons from the case that may be less obvious than "don't misrepresent you did a personal inspection." In that article I go over the full story of the lawsuit, but I've given a snapshot of the lessons I'd draw below. These lessons can be drawn from many lawsuits involving CGs -- the FDIC's case here is just a good teaching piece:
1. The appraisal firm here was organized as a corporation – but it is the individual appraisers being sued and who have potential individual liability. Appraisers need to understand that a corporate or other limited liability form of organization, such as an LLC or LLP, will not shield them from personal liability for their own errors or omissions as a professional. As a licensed professional, an individual appraiser is still liable for his or her own professional work. A corporate or other limited liability form of organization, however, may potentially shield one appraiser from personal liability for the work of another appraiser in the same firm or may shield the owner of the firm from personal liability for the appraisal work performed by other appraisers working for the firm (but see the next point).
2. In this lawsuit, the appraiser/owner of the appraisal firm got himself dragged in as a defendant because, according to the FDIC, he stated in transmittal correspondence that the appraiser performing the appraisal had “personally inspected” the subject property and signed the report on the appraiser’s behalf because she was “out of the country.” Appraisers should first understand that you may be liable based on representations in such transmittal correspondence or in engagement letters. And, as in this case, simply signing a report on behalf of another appraiser may have the same result. Signing a report on another appraiser’s behalf also sometimes leads to “draft” or otherwise incomplete reports being transmitted. It's just a bad practice in general that winds itself into many types of claims we see.
3. The appraiser did an update of her prior appraisal for the lender once the property went into default. (Unlike the prior reports, this update named the lender as the client.) When an appraiser is asked to perform an update of a previous appraisal and the subject loan is now troubled or in default, treat that request carefully. That is a potentially high risk situation because loans in default are the ones that cause most claims and further the appraiser may be reconfirming their own prior negligence, if there are problems in the earlier report. Nevertheless, even when there are problems in the earlier report, we generally advise appraisers to take the update assignment because that is better from a risk stand point than having a new appraiser step in and possibly criticize or call attention to problems with the previous appraisal. If there are problems with the original work, the appraiser should get counsel on how to present the issues properly to the client when performing the update assignment.
4. As we’ve written elsewhere many times, all appraisers should keep workfiles for eight years or longer, even though USPAP only requires that you keep them for five years (or, if longer, two years beyond the final conclusion of litigation in which you’ve given testimony). The first appraisal at issue in this lawsuit was performed in 2005. The FDIC did not file this lawsuit until March 2012. If you’re a good appraiser, you should have a good workfile and a good workfile will be your lawyer’s best tool to defend you.
5. Lastly, if appraisers desire to have the defense and protection provided by E&O insurance, appraisers should understand the importance of keeping their insurance coverage for “prior acts” intact. Some appraisers are falling prey to insurance marketed as “no frills” which provides no coverage for the appraiser’s prior acts when the appraiser moves to that policy. This important topic is covered here.
-- Peter Christensen

Last edited by Privateer : 03-28-2012 at 08:33 PM. Reason: add quotes and clarify
  #25  
Old 03-28-2012, 02:59 PM
Privateer Privateer is offline
 
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Quote:
Originally Posted by Vernon Martin View Post
Peter, thanks for sharing this. My first reaction is one of relief, if this is the first FDIC lawsuit against a commercial appraiser, since it is a case based on facts alone and the appraisers appear to have committed an obvious USPAP violation of Standard 2-1(c).

I'm curious to know more about the fairness of the demand letters and subpoenas coming from FDIC.
Vernon,

Lawsuits and demand letters from the FDIC range from making ridiculous assertions about allegedly negligent conduct by the appraisers to alleged negligence that is quite obvious, if true (such as in the case shared above).

Here are some examples of the ridiculous from the FDIC (all of which don't involve my company's clients -- whose situations I won't discuss):
  • Suing an appraiser whose appraisal had been forged, and, after finding out about the forgery, dragging out the lawsuit for months and refusing to dismiss the lawsuit, unless the appraiser agreed to a sign settlement agreement which, while not requiring the appraiser to pay any damages, required that the appraiser agree to release the FDIC and its attorneys of any potential liability for claims the appraiser might bring, such as for malicious prosecution.
  • Alleging that appraisers violated USPAP and are liable for hundreds of thousands of dollars based on things like this -- these are the FDIC's actual word-for-word allegations in lawsuits:
  1. "Three of the comparables that were used were over one mile from the [subject] property and one of the comparable sales exceeded a sale date greater than six months from the subject."
  2. "[Appraiser] violated USPAP standards by misleading Downey concerning available comparables as follows: a. [Appraiser] used a comparable (No. 2) that was over one mile from the [subject] property."
  3. Appraiser violated USPAP because: "comparable 1 had appreciated $120,500 in seven months (25.9%) and [Appraiser] did not analyze if that appreciation was sustainable or, the product of real estate speculation." (Emphasis added.)
On the other hand, there are certainly many situations where the appraiser truly did act negligently or fraudulently -- but, there are defenses for those appraisers too: "the lender do not even look at the appraisal before making the loan" or "the lender didn't even verify if the borrower could make the first payment."

Last edited by Privateer : 03-28-2012 at 03:15 PM.
  #26  
Old 03-28-2012, 03:10 PM
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Calvin the Airedale Calvin the Airedale is offline
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Having been the CA of an institution that was taken over by Resolution Trust in 1992, and seeing how they operated the institution for a year or so, I came to the conclusion that it was just plain dumb luck that our entire country wasn't yet speaking Russian.

Government regulators then, and likely now, are not well versed in subtle nuance or half measures. No measures and ignorance, they have down pat.
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  #27  
Old 03-28-2012, 04:06 PM
Privateer Privateer is offline
 
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Quote:
Originally Posted by NORTON View Post
so what is this one all about [referring to $75,000,000 settlement involving a whistleblower against a lender and AMC] ...a lone appraiser taking on the big machine? also, thank you so much for contributing and answering questions that weren't even asked
Norton, yes, it was one lone appraiser, who now stands to possibly collect 15-25% of that $75 million as a bounty under the federal False Claims Act.

-- Peter Christensen
  #28  
Old 03-28-2012, 08:44 PM
Privateer Privateer is offline
 
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Quote:
Originally Posted by Scott Lanz View Post
Privateer,

I have thought about this issue some and maybe you, or others, could shed some light on this question I have.
What would the end game look like for an appraiser successfully sued for 10 million dollars from the FDIC?
The E&O cap wouldn't cover that size of judgement and I doubt many appraiser's balance sheet would.
Scott,

We do not insure or defend the appraisers in this particular lawsuit, so I'm not speaking about their specific situation and I wouldn't talk about the case if they were our clients.

However, I have seen the FDIC sue and win against appraisers who were not our clients and who either didn't have insurance or had insurance but their coverage excluded the FDIC's claim -- not quite the situation you were asking about but close. Faced with an actual judgment (here's an example), these appraisers basically have three options, if they can't pay it: (1) try to negotiate with the FDIC a settlement that is manageable, (2) live with the judgment hanging out there against them but hope the FDIC doesn't start collection procedures, and/or (3) file for bankruptcy (if the appraiser is teetering financially at the beginning of the FDIC case, the appraiser would typically file for bankruptcy at that point rather than trying to fight it out). I've seen all three.

-- Peter Christensen

Last edited by Privateer : 03-28-2012 at 09:13 PM.
  #29  
Old 03-29-2012, 06:16 AM
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Scott Lanz Scott Lanz is offline
 
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Privateer,

Thanks much for your insight on this issue, very interesting posts.
  #30  
Old 03-31-2012, 11:31 AM
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Terrel L. Shields Terrel L. Shields is offline
 
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Quote:
While some of you might not have been around for the S&L debacle back in the 80s, all kinds of actions against appraisers were pursued. Many successfully.
Speaking of which....a long time appraiser, even a state board member, told how he returned "home" from Denver. Back then he appraised a condo conversion. Proposed construction. The conversion never happened. The Apartments went into default. The RTC took over and sued him. His E & O settled.

They argued that the proposed value was sufficient enticement for a lender to loan the full amount (never mind the report was "proposed" construction and the conversion never happened.)

At least that's the story told me as I recall it although it was a number of years since I heard him tell it.
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