Appraisal Warranty Insurance

[Junior Member]

Mike,

Thanks for the very detailed response. I'm going to do a summary post on the various questions and responses in this thread, and will get to the detail there.

Most importantly, an inaccurate value is not the same thing of course as negligence or even necessarily a USPAP violation. We certainly don't plan to be setting up an appraiser for a fall on a civil suit or board complaint -- especially given that we will likely be insuring many of them for their separate E&O. The experience from actual warranty claims is that a lender's interest stops at that point. Certainly, however, lenders currently already have a Dodd-Frank-imposed duty to refer UPAP violations to state boards. Their compliance with that presently is minimal (for good or bad of the appraisal profession) and I don't think insuring the accuracy of values will change that one way or another.

-- Peter Christensen

 

[TRESinc]

mike kind of covered it, but i'll ask anyway.

appraisers have been the scapegoat for lenders for years. i personally had a friend denied for a loan years ago and the reason they were given was "the appraisal didn't come in where they needed it to" when in fact it was, imho, well within an acceptable range for values in that area.

we have no control over what a borrower will do, or go through, somewhere down the line after the loan has closed. who will determine, if a case should arise, that the foreclosure is a direct result of the appraisal? aside from someone intentionally blowing up a value how can this be proved, and more importantly who will be responsible for proving it? if the borrower loses their job and defaults what protection would we have that the lender could not somehow shoehorn the responsibility on the appraiser? we are already the most unprotected link in the chain and the first to be blamed for anything (it was our fault the bubble formed, our fault it burst, our fault for holding back the economy with "low" appraisals, etc).

 

[Mike Kennedy]

Mike,

Thanks for the very detailed response. I'm going to do a summary post on the various questions and responses in this thread, and will get to the detail there.

Most importantly, an inaccurate value is not the same thing of course as negligence or even necessarily a USPAP violation. We certainly don't plan to be setting up an appraiser for a fall on a civil suit or board complaint -- especially given that we will likely be insuring many of them for their separate E&O. The experience from actual warranty claims is that a lender's interest stops at that point. Certainly, however, lenders currently already have a Dodd-Frank-imposed duty to refer UPAP violations to state boards. Their compliance with that presently is minimal (for good or bad of the appraisal profession) and I don't think insuring the accuracy of values will change that one way or another.

-- Peter Christensen

Thank you Peter. I highlighted the term "inaccurate value" in my first post and again here for the specific reason I believe you caught.

from Post #1 "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."

If the determiners of "accurate value" would likely be other Appraisers ( 2 plus a possible "tie-breaker" as you noted) - then "accurate" is a misnomer and should not be the basis for a determination of a claim on any insurance policy.

Market Value Opinions are just that - Opinions. In consideration of the retrospective tense of review - are the Opinions of the Reviewers well-supported and better supported than that of an original Appraiser? If so, based on what criteria? If not, then the Review appraisals are somehow deficient.

I suggest the Standards of USPAP, as well as the Ethics, Competency and Scope of Work Rules must be the "bar" - leading back to whether or not the original Opinion, and for that matter the Appraisal Review Opinions (when performed by Licensed Appraisers) were developed in compliance with the applicable USPAP and/or State appraisers' Laws.

Unrealistic expectation of "Accuracy" is in the mind of the possible Lender-client or Lien-holder.

The USPAP, and State Appraiser's Laws where they exist correctly do not address, nor require "Accuracy", they require well-supported "Credibility".

 

[Junior Member]

Thank you Peter. I highlighted the term "inaccurate value" in my first post and again here for the specific reason I believe you caught.

from Post #1 "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."

If the determiners of "accurate value" would likely be other Appraisers ( 2 plus a possible "tie-breaker" as you noted) - then "accurate" is a misnomer and should not be the basis for a determination of a claim on any insurance policy.

Market Value Opinions are just that - Opinions. In consideration of the retrospective tense of review - are the Opinions of the Reviewers well-supported and better supported than that of an original Appraiser? If so, based on what criteria? If not, then the Review appraisals are somehow deficient.

I suggest the Standards of USPAP, as well as the Ethics, Competency and Scope of Work Rules must be the "bar" - leading back to whether or not the original Opinion, and for that matter the Appraisal Review Opinions (when performed by Licensed Appraisers) were developed in compliance with the applicable USPAP and/or State appraisers' Laws.

Unrealistic expectation of "Accuracy" is in the mind of the possible Lender-client or Lien-holder.

The USPAP, and State Appraiser's Laws where they exist correctly do not address, nor require "Accuracy", they require well-supported "Credibility".

Thanks Mike. Accuracy is not the exact term used in the policy documents for this type of policy. Most policies actually use a term that might sound worse to you: like "correct market value." The coverage in this type of policy (both as proposed for appraisers and as currently in place for AMCs) is not tied to USPAP or pinned to USPAP terminology like was the apraisal or value "credible" or whether the original appraiser complied with USPAP. The lender demand has been for insuring an appraisal in terms of the "correctness" of the valuation number within a given error tolerance. That is what lenders say they need for purposes of making their loans in relation to LTV considerations because true LTV and credit have been shown to have the clearest relationship with loans losses.

However, I can certainly see additional value to insuring elements of USPAP compliance because lenders do incur costs from non-compliance of appraisals in the form of repurchases tied to USPAP violations.

--Peter Christensen

 

[Mike Kennedy]

Most policies actually use a term that might sound worse to you: like "correct market value."

Peter, your assumption is entirely correct. It sounds worse but "accurate" and "correct" are synonyms for the same "straw" the Lenders base their "demand" on. Neither exist in documented, industry practice or legal regulations governing appraisals.

IMO, Should Attorney's seeking damages be enabled to include "do you have a "correct" insurance policy as well as E&O?" - the Appraiser will be seen as having "deeper pockets" and stand alone. Once authorizing their "correct" policy to pay out - I do believe strongly, Lenders along with other parties with vested interests in "doing the deal" WILL use that pay-out as an admission of USPAP non-compliance and grounds for State Board complaints.

I suspect that qualifications for Lender / AMC / Client approval to obtain new business will also be negatively impacted as a result of a "correctness" element that does not and never did exist in "Appraisalworld".

 

[Mike Kennedy]

Follow up - see Para 1, sentence 3 "a small fraction"

"The 8 biggest appraiser liability cases in the U.S." - article
http://appraisersblogs.com/appraisal/the-8-biggest-appraiser-liability-cases-in-the-u-s/

P.S. many thanks to you Peter, and Mr. Wiley, for ALL you do on behalf of Appraisers Nationwide.

 

[William K]

As the government pushes to have private firms take a larger role in the secondary market I can understand the need and desire by lenders to have such insurance in place. I feel the problem is that the lender will attempt to have the appraiser pay for the insurance without reimbursement.
Now, the insurance company could turn the table around by not offering the appraiser the ability to acquire the insurance but only offer it to the lender. By "selling " it this way the lender will be on the hook for not only purchasing the policy but also making sure the appraiser that is used is qualified. If the lender wishes to have the warranty insurance policy then the insurance company can always be the one to decide that the appraiser performing the appraisal is qualified.
In essence the insurance company is saying we will insure (warrant) the appraisal but only for these (list) of approved qualified appraisers.

The lender may decide that they don't need to pay for qualified appraisers but rather use the "fast and cheap" crowd who "skip" over proper practices.
Then again the lender may want to sell the loan with a "warranted" appraisal and in order to do so will have to use an appraiser who has been "qualified" by the insurance company. In this scenario the appraiser is not the one purchasing the insurance but rather the lender who is actual receiving the potential "payout" on the policy is purchasing the appraised value insurance warranty.

 

[DTB]

As the government pushes to have private firms take a larger role in the secondary market I can understand the need and desire by lenders to have such insurance in place. I feel the problem is that the lender will attempt to have the appraiser pay for the insurance without reimbursement.
Now, the insurance company could turn the table around by not offering the appraiser the ability to acquire the insurance but only offer it to the lender. By "selling " it this way the lender will be on the hook for not only purchasing the policy but also making sure the appraiser that is used is qualified. If the lender wishes to have the warranty insurance policy then the insurance company can always be the one to decide that the appraiser performing the appraisal is qualified.
In essence the insurance company is saying we will insure (warrant) the appraisal but only for these (list) of approved qualified appraisers.

The lender may decide that they don't need to pay for qualified appraisers but rather use the "fast and cheap" crowd who "skip" over proper practices.
Then again the lender may want to sell the loan with a "warranted" appraisal and in order to do so will have to use an appraiser who has been "qualified" by the insurance company. In this scenario the appraiser is not the one purchasing the insurance but rather the lender who is actual receiving the potential "payout" on the policy is purchasing the appraised value insurance warranty.

Good points WK and MK.

If the insurer had to qualify the appraiser, then that would open the door for the appraiser to significantly raise their fees. Lender seeks an insured appraisal, it is available from a limited supply of appraisers.

Maybe the lender would even pay for the more expensive appraiser on non insured appraisals.

The biggest issue regarding fees is that fees are treated only on a cost basis instead of a value proposition. Very limited amount of appraisals are "sold" based on the value (not property value) of an appraisal.

Great thread.

 

[JTip]

If the insurer had to qualify the appraiser, then that would open the door for the appraiser to significantly raise their fees.

Doubt it.

Just because you qualify for insurance doesn't mean you are better. Take performance bonds. I could issue one for $50k in a matter of minutes for several hundred bucks IF the insured nailed down the process of paying their bills on time. For the others that always had an excuse (dog ate the check), I could issue the EXACT same policy for a few hundred more and a day or two of background.

Two framing contractors, same bond. Who are you going to pick? Pick the one with the 4 year degree......

A thread talking about appraisal warranty insurance and you can't even get appraisers to buy a commercial auto policy/GL policy/E&O policy without crying conspiracy.

 

[William K]

Doubt it.

Just because you qualify for insurance doesn't mean you are better. Take performance bonds. I could issue one for $50k in a matter of minutes for several hundred bucks IF the insured nailed down the process of paying their bills on time. For the others that always had an excuse (dog ate the check), I could issue the EXACT same policy for a few hundred more and a day or two of background.

Two framing contractors, same bond. Who are you going to pick? Pick the one with the 4 year degree......

A thread talking about appraisal warranty insurance and you can't even get appraisers to buy a commercial auto policy/GL policy/E&O policy without crying conspiracy.

The difference being that the afore mentioned insurances insure the appraiser whereas this Appraisal Warranty Insurance actually protects the lender directly.
It rewards the lender for using "qualified" appraisers ( allowing for the value to be warranted) and rewards an appraiser for being a "qualified" appraiser.
I would think both the lender and the appraiser of an Insured Warranted Value Appraisal report would be able to be compensated at a greater level for such a guarantee.

I am sure an AMC would upsell the "qualified" appraiser with Appraisal Warranty Insurance to lenders while still using the "Fast and Cheap" to perform those appraisals which the lender does not care about providing a Warranted Value.