Appraisal Warranty Insurance

[Junior Member]

Many people are not aware of this but some AMCs are able to insure the accuracy of delivered appraisals by providing appraisal warranty insurance. In some situations, it is required by a lender and, in others, AMCs use appraisal warranty insurance as a marketing tool to differentiate their services from competitors who do not offer the coverage. I'm raising this here to find out what appraisers' reactions would be to the concept of being able to offer the same insured warranties directly to lender clients.

This is very different insurance than an appraiser's or AMC's E&O insurance because it insures directly a lender's loss relating to a deficient appraisal in the event of a foreclosure (or repurchase in some cases), though the appraisal warranty insurance is usually paid for by the AMC. In contrast, an E&O policy exists to defend the insured appraiser or AMC against negligence-type claims/lawsuits and to pay damages legally established in those claims/lawsuits. Regular E&O also responds to a wider variety of claims from all sources (like borrowers or the FDIC). However, although focused only on a lender's loss due to an inaccurate valuation, appraisal warranty insurance is much more expensive on a per appraisal basis because it directly pays a lender's loss and the payment of that loss does not depend on a lawsuit or other legal action or on whether the appraisal is actually established as negligent. The two are not substitutes for each other.

Here is a very brief summary of how appraisal warranty insurance presently works for AMCs:

• An express appraisal warranty to a lender-client is made that an appraisal meets a specifically defined range of accuracy as of the date of value.
• The warranty is backed by a warranty insurance policy, which names the lender as a beneficiary of the policy.
• The policy covers breaches of the appraisal accuracy warranty when the lender incurs a financial loss in connection with a mortgage default/repurchase and if the appraisal is found to have overstated the value of the subject property by the defined range (in present coverage that range is usually 10%). Whether there was an error and the amount of the error is determined under the policy through a procedure using independent retrospective appraisals from a neutral source.
• The lender’s covered loss as defined in the warranty policy includes unpaid principal, interest, and foreclosure costs, etc. up to a maximum coverage amount (usually $100,000 to $250,000 per appraisal).
• The coverage under the insured warranty remains in place for 5 years from the date of the appraisal.
• The premium for the 5 years of coverage for an appraisal is paid one time at the time of delivery. The one-time premium ranges from $15-$30 depending on coverage.

Having this insurance product allows some AMCs to go after certain lenders' business. It costs the AMCs money but they may see it as a competitive advantage. Not all AMCs are able to provide the coverage because of their risk characteristics.

Is this something that appraisers would ever want to be able to offer in some form directly to clients? Keep in mind, it is not free -- for AMCs, it presently costs them $15-$30 per appraisal. In my view, an appraiser would also need to be well-qualified to offer an insured warranty to a client, just as not all AMCs can qualify to offer the coverage. Insurers are not interested in insuring warranties made by riskier operators.

The potential reasons I would see in favor of qualified appraisers having the ability to offer insured appraisal warranties would be things like:

• Potential ability to charge a higher appraisal fee for an insured valuation and to differentiate from the competition.
• Potential ability to attract certain lender business (and possibly to compete with AMCs for it).
• Potential for organized groups of appraisers to differentiate their group by having an ability to deliver insured appraisals (and also possibly to compete with AMCs).
• With proper contracting, the possible ability to limit liability to a lender to the terms of the insured warranty.

If the above points are, in fact, benefits to appraisers who can offer it, then the question is whether it is worth the cost to the appraiser -- and because of the direct loss covered for lenders and their direct ability to recover it under the policy, the cost is not cheap, likely $15-$30 per appraisal. So, any bump in fees or business needs to accommodate that cost.

I'd like to hear comments from appraisers on whether they think this concept has a place in their competitive world. This is a very doable product for appraisers if it has a fit in your world.

-- Peter Christensen, LIA's general counsel

 

[Renee Healion]

What would be the qualification criteria for an individual appraiser or small group of appraisers?

This is very interesting,Peter, nice to see a thoughtful alternative proposed.

 

[Junior Member]

What would be the qualification criteria for an individual appraiser or small group of appraisers?

This is very interesting,Peter, nice to see a thoughtful alternative proposed.

Renee,

That's certainly up for comment. My view of qualifications needed to perform an insured valuation would involve something like: a certain number of years experience as a fee appraiser, completion of specific education regarding risk mitigation for lender assignments (for CE too) similar to what we offer now to appraisers but more focused on valuation errors, an evaluation of the appraiser's ongoing appraisal education, a review of sample work, and an acceptable history free of material liability. The qualification criteria serve two purposes: (1) on this type of insurance, a carrier really needs to be sure of the qualifications/history of the appraiser to minimize valuation errors and outright fraud, and (2) the criteria enhance the marketability of insured valuations offered by the appraisers. There is no intention to make this like a designation, however, or to make or even charge money for the elements needed to qualify, the qualification criteria to enhance risk avoidance and improve marketability of the insured valuations. An insurer makes money only by selling the insurance and assuring that losses stay under the total premiums.

-- Peter Christensen, LIA's general counsel

 

[Joe Flacco]

$15-$30 per report seems too expensive for this coverage. That would come out to about $5000-$7000 per year for a full time appraiser doing 250 orders per year. Considering it will be limited to appraisers with certain qualifications and history are these appraisers really concerned with appraising a property more than 10% over actual value? 10% is a big margin of error which is required before the insurance pays out.

 

[Hondo]

Does the appraiser have to purchase the insurance for all appraisals or can it be for just select Clients? Also, do we need to have our E&O with the insuring company or can this be purchased as a stand alone policy? I think $15 per $100k coverage would be acceptable and would be a benefit to some direct Clients and would generate extra business for appraisers.

 

[Junior Member]

$15-$30 per report seems too expensive for this coverage. That would come out to about $5000-$7000 per year for a full time appraiser doing 250 orders per year. Considering it will be limited to appraisers with certain qualifications and history are these appraisers really concerned with appraising a property more than 10% over actual value? 10% is a big margin of error which is required before the insurance pays out.

Thank you. I really appreciate the comments on pricing and the error variance. The counterbalancing force is that lender financial losses due to inaccurate appraisals greatly exceed $7,000 per appraiser on average even when a 10% margin of error is applied.

If the default rate for a class of mortgages is at 2%, the financial losses incurred by lenders attributable to appraisal inaccuracy typically exceed $65,000 per appraiser annually on average, before applying a 10% acceptable error rate. (Appraisers don't feel the impact personally or in their E&O because of friction in lender ability to push the losses down.) Getting the premium for appraisal warranty insurance down to the $15-$30 range is only possible by qualifying appraisers, reducing the risk, and have a 10% acceptable valuation range so that only losses on the worst appraisals are covered by a warranty -- and it may not even be possible to get it down to that level.

So, if it's not possible for an appraiser to charge more for an insured valuation to cover the cost of the warranty insurance, then the product won't fly for appraisers. Your input suggests that appraisers won't be able to charge more for an appraisal whose accuracy is insured within 10%.

-- Peter Christensen, LIA's general counsel

 

[Junior Member]

Does the appraiser have to purchase the insurance for all appraisals or can it be for just select Clients? Also, do we need to have our E&O with the insuring company or can this be purchased as a stand alone policy? I think $15 per $100k coverage would be acceptable and would be a benefit to some direct Clients and would generate extra business for appraisers.

Thank you for the input on the value proposition.

The insurance would not have to be for all appraisals. The way it works now for AMCs is that it covers all appraisals for just specific clients when the appraisals are within the appraisal product types ordered and meet very basic eligibility criteria (1% might fall outside the criteria), and the lenders want it that way. The most difficult issue to deal with when setting up the insurance for individual appraisers or groups of appraisers would be whether it must apply to all of the appraisals for a certain client or whether coverage can be picked here and there (which can greatly magnify the risk to an insurer on an individual insured appraisal).

There is no tie to an appraiser's E&O but . . the existence of that coverage with a reputable provider that engages in actual underwriting is a consideration because it helps in assessing the appraiser's previous liability history and whether there are material problems that would mean a bad risk to insure for the ability to provide insured valuations to lenders (e.g., if you were an insurer, would you want to authorize an appraiser to provide insured valuations to lenders which directly pay a lender's loss if the appraiser already has been sued twice in the recent past by lenders?)

 

[sandpiperapp]

Can it be offered as an add on individual appraisals?
Typical URAR fee $400
URAR with warranty $430

 

[Junior Member]

Can it be offered as an add on individual appraisals?
Typical URAR fee $400
URAR with warranty $430

Not likely. Non-lender users of appraisals are more likely to make claims than lenders because lenders almost universally only make claims if there has been a default or repurchase -- so that weeds out 90-99% of bad appraisals from having claims depending on the default rate. Non-lender claims also allege damages that are far less predictable. For example, if you do an appraisal used by two owners of property to decide on a buy out price of one of the owners by the other, a very high percentage of the time one of those parties is going to be unhappy with how much they received or paid based on your appraisal and is a lot more likely to sue you than a lender. Now, throw in a warranty for $30. I guarantee you one or both will make a claim on the warranty. Same goes for assignments like estates, divorces, arbitrations, right of way. That's why I have a special class on the subject now.

-- Peter Christensen, LIA's general counsel

 

[Renee Healion]

The greatest value AMCs offer their lender clients is exactly this sort of warranty.

How much do AMCs really manage appraisals? Look to a current thread for the sort of errors escaping their detection. If anything, their own protection should rest on their diligent management of appraisals.

On the one hand, they assure clients against their worst outcome and on the other hand, they increase their own risk by driving out the most experienced appraisers with their fee pressure and scope creep.

As a model the AMC has many other weaknesses: greater scrutiny by the feds, increased state regulation, inflexible scaling, exposure to economic conditions which many of them are unable to weather.

AMCs do offer one-stop shopping for large-volume users. But there has to be at least a small market for an alternative such as an appraisal with warranty. It is a shame to see community banks and credit unions go with AMCs. Maybe this would be the market but there has to be more.

AMCs have invaded almost every niche of our business. This would put us in a position to compete with them on an issue of critical concern to clients.

or have I totally missed the boat here lol