Many have rightfully blamed, in substantial part, appraisers for the meltdown of the real estate market. As alleged in many lawsuits, appraisers inflated values in order to ensure that deals would close escrow and so that the appraisers would stay in the “good graces” of the mortgage brokers who selected the appraisers. Many mortgage brokers only got paid if the loans closed. So, the brokers and appraisers were aligned to inflate values to support the purchase price, and to close the deal and make their fees. (This in now way suggests that all appraisers or mortgage brokers succumbed to the economic incentives. There are certainly many ethical, honest and forthright individuals working in this industry.)
Now that the real estate market has tanked, lenders and others are on “high alert” for inflated appraisals. Oddly enough, as a result, appraisers are now being criticized for valuing properties too low. Appraisers who are conservative are now accused of killing transactions (refinancing and sales) by finding the value at less than the amount needed to support the loan to value ratio.
Borrowers and sellers, and the real estate market in general, are harmed by unreasonably and unjustifiably low valuations by worried appraisers. While we are unaware of any lawsuit against an appraiser for undervaluing a property, such a claim is possible under the right circumstances. An appraiser can be held legally liable for materially failing to follow industry standards in such a way as to make a substantial mistake in the value of the property.
With the continued weak real estate market, claims and lawsuits against appraisers remain high. In the first Quarter of 2010, the mortgage industry saw a record level of mortgage related lawsuits, according to MortgageDaily. As the economy remains week, it is no surprise that more lenders and borrowers are looking more closely at the appraisals obtained at the time that their loan or purchase was made to see if the value was inflated. If so, they may have a claim.
An appraiser who does not follow USPAP and other requlations, or makes other material errors in a report, is likely liable for negligent misrepresentation. Under Arizona law, the injured bank or borrower may pursue a claim for damages against the appraiser. Many appraisers carry insurance for such claims.
Our law firm, Berk & Moskowitz, P.C., won the first reported decision allowing a borrower to sue an appraiser for negligent misrepresentation, even though the lender hired the appraiser. We have handled multiple cases against appraisers. If you think that your appraiser made a mistake and want to evaluate pursuing a claim, contact us. We provide aggressive, efficient representation in all types of appraisal and real estate cases.
Under Arizona law, a borrower is now allowed to sue an appraiser hired by the lender. For the first time in a reported decision by any Arizona Court, the Arizona Court of Appeals has recognized that a borrower is likely to rely on an appraisal prepared for the lender, such that the borrower may sue the appraiser for malpractice.
In the case, Sage v. Blagg Appraisal Co., the buyer/borrower discovered that the appraiser had substantially overvalued the property at the time of her purchase as a result of an error in the square footage, among other things. The borrower sued the appraiser. The trial court dismissed the case on the basis that the appraiser was hired by the lender, such that, in the Court’s view, the appraiser had no duty to the borrower. The Arizona Court of Appeals unanimously disagreed.
In its decision issued April 30, 2009, the Court of Appeals held that the appraiser should know that the buyer/borrower in a purchase money loan transaction is entitled to receive a copy of the report and to rely on the report in proceeding with the transaction. Based on that reality and other factors, the Court held, for the first time in a reported decision, that the appraiser did owe a duty to the buyer/borrower. Thus, the Court of Appeals reversed the trial court’s dismissal and allowed the case to proceed. The case was later settled.
The case was handled by the Scottsdale, Arizona law firm of Berk & Moskowitz, P.C. The firm handles all types of real estate appraisal malpractice claims.
Fraud in the appraisal increased from 22% of all fraud reported in 2008 to 33% in 2009, according to the Mortgage Asset Research Institute 2009 Mortgage Fraud Report. The Institute reviewed data regarding fraud in federally insured loans. Surprisingly, according to the report, mortgage fraud rose in 2009, even though the total number of new loans declined.
Mortgage fraud reports (suspicious activity reports) rose from 5% to 8% from 2008 to 2009. Arizona is now the 4th worst state in the Country for mortgage fraud. Arizona has approximately 58% more incidents of reported fraud than anticipated for the number of new loans in 2009. Fraud in the appraisal (such as selecting incorrect comparables or making unsupported adjustments) was one of the main types of fraud that dramatically rose, according to the report.
Since the real estate market crash, there is a push to reform the regulation of home appraisers. Some believe that one such step, the Home Valuation Code of Conduct, does not go far enough. That Code, among other things, prohibits certain appraisers from dealing directly with the mortgage lender or broker, but instead requires the use of appraisal management companies (AMC’s) to act as a “middleman.” There is also the Arizona Board of Appraisal, which regulates appraisers and can revoke licenses, among other things.
Of course, parties injured by a negligent or intentional error in an appraisal generally have the right to bring civil claims for damages as described elsewhere in this website. If you have questions or feel that you or your company were injured by an appraiser, please contact us.
Even though the appraiser is generally hired by the lender, under Arizona law and given changes in the Uniform Residential Appraisal Report form, the buyer/borrower may still rely on the appraisal report. Essentially, that means that if the appraiser makes a mistake in the valuation or the report and the borrower/buyer is harmed as a result, the borrower/buyer may sue the appraiser for losses sustained.
The most common mistakes by appraisers include: overvaluation, errors in square footage and discrepancy in property types used for comparison. If you believe that there was an error in an appraisal, generally, it is best to first have another trustworthy appraiser review the original report to determine whether there was a mistake. You should also promptly consult with an attorney to determine what your rights are and what deadlines (statutes of limitation) may apply to your potential claims. We handle all types of claims against appraisers on behalf of homeowners and lenders.
Our law firm handles all types of appraisal malpractice claims against all types of appraisers, including residential, commercial and raw land. If you feel that an appraiser committed fraud or was negligent, contact us. Our attorneys will provide thorough aggressive representation.
Designed to avoid conflicts of interest and undue pressure on appraisers, under the recently adopted Home Valuation Code of Conduct (HVCC), in connection with certain loans, mortgage brokers can no longer hire appraisers. Rather, the HVCC required the formation of appraisal management companies (AMC) to act as an intermediary between the lender/broker and the appraiser. But, this structure has, in the view of many appraisers, created other problems.
Appraisers are now complaining that after the AMC takes its share of the appraisal fee paid by the borrower, the fee paid to the appraiser is not sufficient. According to AppraiserSupport.com, the vast majority of appraisers are now being paid less than $250 per appraisal report. As explained on that website:
Brokers and Consumers are not ALLOWED to contact and hire the most qualified appraiser. Everyone who wants an appraisal must use an Appraisal Management Company who charges for a quality appraisal and sends out the appraisal order to bid – hoping to find the cheapest appraiser in the area. The Appraisal Management Company collects the full fee from the consumer and pays the least amount possible to the actually licensed appraiser.
It will certainly be interesting to see how the appraisal industry and regulators resolve this apparent problem.
On January 19, 2010, the Plaintiffs in Johnson v. KB Home et al filed their Motion to Certify the Class in the Arizona District Court action. The Motion asks the Court to confirm that the class representatives can proceed against the Defendants on behalf of the similarly situated group of people. According to the Proposed Order Granting Motion for Class Certification, the class would consist of:
All consumers in the “Southwest” segment of KB’s operations (Arizona and Nevada) who purchased a home from KB Homes and whose loans were through the Countrywide, or a KB entity or the Countrywide-KB joint venture at any time since the creation of the Countrywide-KB Criminal Enterprise and the date of judgment in his action.
On July 21, 2009, an amended complaint was filed against KB Home, Countrywide and others in the United States District Court for Arizona. The amended complaint includes the same basic claims as in the original complaint – that the Defendants engaged in a scheme to artificially inflate prices and home values using fraudulent appraisals, among other things.
Prior to filing the class action complaint against KB Home, Countrywide and others in Florida, an almost identical class action complaint was filed in the United States District Court for Arizona. Like the Florida class action complaint, the Arizona complaint alleges a scheme to improperly inflate purchase prices using fraudulent appraisals.