Appraiser hired by lender owes a duty to buyer/borrower.

[timd354]

Steve ... how has the cost of doing business increased substantially? Is there any value difference between an appraisal for market value ordered and provided to a lender and an appraisal for market value ordered and provided to an owner / borrower? While liability may have slightly increased, it has always been there, I dont see much difference honestly and Id like your thoughts.

PE, are you kidding? How can you not see how the cost of business in AZ has increased substantially because of this decision. It has basically tripled* the appraiser's potetential liabilty and risk of liability is a cost of business that must be accounted for in every business model. You can bet that E&O premiums will increase substantially in the near future in AZ because of this decision.

*The reason that the appraiser's risk of liability has been tripled by this decision, is now the appraiser has to worry about being sued not only by a lender, but the appraiser now can be potentially sued by the buyer and the seller (yes, the Court's ruling undoubtedly would also allow a seller to sue the appraiser if the appraisal is less than the sales price and the buyer walks away from the transaction) , neither of whom could succesfully sue an appraiser hired by a lender for a mortgage lending appraisal in AZ before.

 

[timd354]

kinda scary, the report must have been done on the "old" form but the court is holding the appraiser to the verbiage of the new forms.

Page 18:

Our recognition of the duty owed by an appraiser to
the buyer/borrower, moreover, is consistent with evolving
industry standards that acknowledge that a buyer/borrower in
fact relies on an appraisal prepared at the request of the
lender. In March 2005, a few months after Blagg performed his
appraisal of the home Sage was to purchase, the Federal Home
Loan Mortgage Corporation (“Freddie Mac”) and the Federal
National Mortgage Association (“Fannie Mae”) issued a revised
Uniform Residential Appraisal Report for use by appraisers hired
by lenders in mortgage finance transactions. See Freddie Mac &
Fannie Mae, Uniform Residential Appraisal Report (2005),
available at http://www.freddiemac.com/sell/forms/pdf/70.pdf.
To be sure, consistent with the Uniform Standards of
Professional Appraisal Practice (“USPAP”), the form provides
that “[t]he intended use of this appraisal report is for the
lender/client to evaluate the property that is the subject of
this appraisal for a mortgage finance transaction.” Id. at 4.10
Significantly, however, the federal form also requires
appraisers to certify their understanding that the borrower and
a limited class of others in the same mortgage finance
transaction “may rely on this appraisal report.” Id. at 6.11 An
explanation in a Fannie Mae publication issued November 1, 2005
drives the point home:
The appraiser’s certification [] clarifies
that the appraiser is accountable for the
quality of his or her work to those who
often rely on it as part of a mortgage
finance transaction. The appraiser’s
accountability for the quality of his or her
appraisal should not be limited to the
lender/client and/or intended user
identified in the appraisal report.
Fannie Mae, Single Family 2007 Selling Guide

That is exactly what happened and that is way more than kind of scary, it should scare the hell out of any appraiser in Arizona, since you are not only expected to know and follow current laws and regulations, but you are apparently expected to predict future regulations industry practices (including any future FAnnie changfes) and incorporate them into your appraisal practice today. Good luck with that.

 

[PropertyEconomics]

PE, are you kidding? How can you not see how the cost of business in AZ has increased substantially because of this decision. It has basically tripled* the appraiser's potetential liabilty and risk of liability is a cost of business that must be accounted for in every business model. You can bet that E&O premiums will increase substantially in the near future in AZ because of this decision.

*The reason that the appraiser's risk of liability has been tripled by this decision, is now the appraiser has to worry about being sued not only by a lender, but the appraiser now can be potentially sued by the buyer and the seller (yes, the Court's ruling undoubtedly would also allow a seller to sue the appraiser if the appraisal is less than the sales price and the buyer walks away from the transaction) , neither of whom could succesfully sue an appraiser hired by a lender for a mortgage lending appraisal in AZ before.

Now tell me I dont know how to elicit a response ... !!!!!

 

[Ryan Bailey]

Will this bleed over to commercial?

 

[Calvin the Airedale]

Please explain how a huge expansion of the possible liability of appraisers, which will undoubtedly cause more appraisers to be sued (and yes many of those suits will be groundless and will just be attempts to get a settlement) and which will undoubtedly cause E&O Insurance premiums to rise sharply somehow will benefit appraisers.

Everything you say above may be true. It is clear, or should be by this point in time, that neither regulators, nor lenders themselves gave much thought to the quality and standards of practice performed for their appraisals. They've both cared about lip service, but not much else.

State boards have been active lately yes, in the same sense that the barn is locked after the horses have gotten out.

If consumers have a real stake in the diligence and care provided by appraisers, as indeed they should, then perhaps the threat of legal action will be a greater regulating influence than the do nothing approach adopted for years by the OTS, Treasury and etc.

As far as an expansion of liability, I'm not so sure. Would you argue that we are not liable for our errors, mistakes and misdeeds which harm our client and the users of our reports? This perceived liability has kept many a practictioner on the straight and narrow.

 

[timd354]

Everything you say above may be true. It is clear, or should be by this point in time, that neither regulators, nor lenders themselves gave much thought to the quality and standards of practice performed for their appraisals. They've both cared about lip service, but not much else.

State boards have been active lately yes, in the same sense that the barn is locked after the horses have gotten out.

If consumers have a real stake in the diligence and care provided by appraisers, as indeed they should, then perhaps the threat of legal action will be a greater regulating influence than the do nothing approach adopted for years by the OTS, Treasury and etc.

As far as an expansion of liability, I'm not so sure. Would you argue that we are not liable for our errors, mistakes and misdeeds which harm our client and the users of our reports? This perceived liability has kept many a practictioner on the straight and narrow.

Calvin, while I agree that the regulators, state boards, etc. have failed to do their job I would much rather have no regulation whatsoever than pseudo regulation by a runaway plaintiff's bar and sympathetic judges and juries in many jurisdictions.

The reason liability is increased for appraisers in Arizona and any other state whose courts make a similar ruling is not because appraisers were not previously liable for their errors and omissions to their clients, but now there is a whole a new class of people who are potential plaintiffs against appraisers and this new group of potential plaintiffs will be sympathetic individuals who lost money in the real estate market and they will find sympathetic juries, especially in low income states and juisdictions such as Cleveland, Baltimore, DC, Mississippi, etc (these are some well known jurisdictions that are very favorable to plaintiffs....there are many others). Juries in places like these are notorious for not paying attention to the actual facts of a case or whether or not the defendant actually did anything wrong, but are much more likely to be swayed by emotional arguments. Good luck if you appraised a house in Cleveland, for example, that was legitimately worth $200,000 at the height of the bubble, but is now only worth $100,000....if you get sued over the appraisal in some place like that and the plaintiff is a sympathetic individual, I do not care whether or not you did anything wrong, you are likely in for a rough time........truthfully, in places like that, your E&O Insurer will likely throw money at such a plaintiff becuase they are scared as hell of the juries, and they should be.

Trust me, defending an appraiser against a lender, who can usually be pretty easily painted as a greedy, evil corporation who was supposed to use due diligence and actually underwrite the appraisal is a far different story than defending the appraiser against the nice people who bought a home and lost their home or lost a ton of money becuase of the, as the plaitniff's attoreny will argue, the evil appraiser who was in cahoots with the evil bank and greedy realtors.

 

[Calvin the Airedale]

Calvin, while I agree that the regulators, state boards, etc. have failed to do their job I would much rather have no regulation whatsoever than pseudo regulation by a runaway plaintiff's bar and sympathetic judges and juries in many jurisdictions.

The reason liability is increased for appraisers in Arizona and any other state whose courts make a similar ruling is not because appraisers were not previously liable for their errors and omissions to their clients, but now there is a whole a new class of people who are potential plaintiffs against appraisers and this new group of potential plaintiffs will be sympathetic individuals who lost money in the real estate market and they will find sympathetic juries, especially in low income states and juisdictions such as Cleveland, Baltimore, DC, Mississippi, etc (these are some well known jurisdictions that are very favorable to plaintiffs....there are many others). Juries in places like these are notorious for not paying attention to the actual facts of a case or whether or not the defendant actually did anything wrong, but are much more likely to be swayed by emotional arguments. Good luck if you appraised a house in Cleveland, for example, that was legitimately worth $200,000 at the height of the bubble, but is now only worth $100,000....if you get sued over the appraisal in some place like that and the plaintiff is a sympathetic individual, I do not care whether or not you did anything wrong, you are likely in for a rough time........truthfully, in places like that, your E&O Insurer will likely throw money at such a plaintiff becuase they are scared as hell of the juries, and they should be.

Trust me, defending an appraiser against a lender, who can usually be pretty easily painted as a greedy, evil corporation who was supposed to use due diligence and actually underwrite the appraisal is a far different story than defending the appraiser against the nice people who bought a home and lost their home or lost a ton of money becuase of the, as the plaitniff's attoreny will argue, the evil appraiser who was in cahoots with the evil bank and greedy realtors.

It should be easy for attorneys to portray some appraisers as evil, selfish, greedy, conniving, careless practicioners, who are easily led and directed by the wants and desires of evil, selfish, greedy and conniving lenders.

That describes the character of the skippy hoard.

But I have confidence that those that practice in a scrupulous fashion can easily be defended. The differences in contrast are too great and obvious, even for sympathetic juries.

As to what we'd rather have in terms of regulation, none, tortious, or bureaucratic oversight, well, we have always had all three. I am comforted by the fact that the things I fear seldom come to pass. Perhaps because those fears motivate the way I conduct my business, and perhaps because the fears that result, for instance, from the initial musings on the news of such lawsuits are overblown to begin with.

 

[The Warrior Monk]

As far as an expansion of liability, I'm not so sure. Would you argue that we are not liable for our errors, mistakes and misdeeds which harm our client and the users of our reports? This perceived liability has kept many a practictioner on the straight and narrow.

I'm sure. Many appraisers avoided doing subprime work because of the obvious liability. Even if the appraiser was on the straight and narrow, the stench was so bad that I believe the good will get caught up with the bad. I believe the same situation is arising with GSE-related work...too much liability, especially given the typically poor compensation.

 

[Mike Boyd]

This is nothing new. The only lawsuit EVER against me was filed in 1992. I won't take up space defending my position here in the forum but I lost that suit. The report was for a hard money lender who was using an investor to fund a rather large 2nd mortgage. The loan was made and the borrower never made a payment and it was foreclosed. The investor lost $400,000+- when it eventually resold. Originally, the court found in my favor, the client was the mortgage broker. On appeal, the verdict was reversed. My E&O carrier paid up but the whole thing took nearly 10 years.

 

[Peacemaker]

Will this bleed over to commercial?

Since it looks to me like the court ignored legal precedent and their own previous rulings, I wouldn't feel so safe in the commercial arena either.

Be interesting to see if this is appealed further, and what the result of that is, of course that will take years. In the meantime, this decision may encourage more people to sue whereas they previously may have been discouraged. I am no lawyer but it sure seems to me like the court went out on a limb, citing a Fannie form that wasn't even used in the appraisal. But appeals are expensive so I wouldn't be surprised to see the E&O company (assuming there is one) pay this claim. But boy, does that open a door, so maybe they'll fight it.

I have to wonder if there's more to the story, since any moron can walk through a house and tell if it's 1800 or 2400 square feet. That's a big oops. The realtor didn't notice? The buyer didn't notice?