Appraiser Liability Law

A class action complaint has been filed against home builder giant KB Home and major lender Countrywide, among others, for appraisal fraud.   In the Complaint filed in the United States District Court of Florida on October 30, 2009, the class action representative has brought numerous claims.   Primarily, the claims surround two “schemes” related to appraisals.

THE FIRST SCHEME: For the first scheme, it is alleged that the Defendants conspired to improperly inflate appraisal valuations in order to sell more homes and make more loans, all at inflated amounts.  “Defendants KB Home, Countrywide and LandSafe [a wholly owned subsidiary of Countrywide], along with their network of staff and fee appraisers, formed and operated a criminal enterprise . . . which through the ‘Inflated Appraisal Scheme’ inflated the sale amounts of KB Home properties and loan amounts of Countrywide loans by corrupting the appraisals of KB Home properties such that the appraisals would always indicate a value at or above the contracted sales price for the properties or were otherwise inflated,” according to Paragraph 1 of the Complaint.

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Although the main focus of this site is civil (not criminal) liability of appraisers for negligent misconduct, the government does have the right to bring criminal charges against appraisers who commit fraud and other criminal misconduct.  One such example is the indictment brought against appraiser Kurt Douglas Holm for, among other charges, Conspiracy to Commit Bank Fraud and Bank Fraud.

According to the Indictment filed in the United States District Court for the District of Arizona on March 26, 2008, the alleged co-conspirators “directed appraiser Holm to prepare appraisals that valued the properties at a price required to make a profit on the sale rather than the actual value of the property.  This was done by providing Holm the amount of loan needed before he conducted the appraisal.  Holm inflated the value of the property by including in the appraisal improvements to the property that did not exist.  For example, he included non-existent improvements such as roads, sewer systems and electricity.”  This was all allegedly done in order to inflate the value of the property and to obtain loans for more than the true value of the property.  But, on November 3, 2009, the United States filed its Motion to Dismiss the charges against Appraiser Holm without prejudice (meaning the charges could be refiled) becuase it was in the best interests of the government.  On November 5, 2009, the Court entered its Order dismissing the charges against Mr. Holm.

In 2009, the appraisal industry has experienced the same record volume of claims against appraisals as was seen in 2007 and 2008.  Noticeable trends include more claims by borrowers, lenders, banks and the FDIC on behalf of failed banks.  Most commonly, the claims involve an alleged overvaluation of the subject property by the appraiser.  An overvaluation may occur when the appraiser makes an error in measuring the square footage of the property, or fails to make appropriate adjustments for view, condition, renovations, access, size and/or lot size, among many other types of mistakes.  Berk & Moskowitz, P.C. has handled and is handling claims against appraisers for overvaluing properties arising from almost all of those types of errors.

Many people in the appraisal industry still believe that only the “intended user” of an appraisal report may sue the appraiser.  This is likely wrong for at least two reasons.

First, in Arizona, pursuant to Sage v. Blagg Appraisal Co., a buyer/borrower in a purchase money loan transaction may sue an appraiser hired by the lender even if the buyer/borrower is not listed as an “intended user.”

Second, as of March 2005, Fannie Mae and Freddie Mac adopted a new Uniform Residential Appraisal Report  form (generally used in connection with residential loans) that explicitly allows certain third-parties (i.e. parties other than the lender) to receive and rely on the report.  Specifically, item 21 of the Appraiser’s Certification provides, in part, that:

The lender/client may disclose or distribute this appraisal report to:  the borrower; another lender at the request of the borrower; the mortgagee or its successors and assigns; mortgage insurers; government sponsored enterprises; other secondary market participants; data collection or reporting services; professional appraisal organizations; any department, agency, or instrumentality of the United States; and any state, the District of Columbia, or other jurisdictions; without having to obtain the appraiser’s or supervisory appraiser’s (if applicable) consent.

In addition and more importantly, item 23 of the Appraiser’s Certification provides as follows:

The borrower, another lender at the request of the borrower, the mortgagee or its successors and assigns, mortgage insurers, government sponsored enterprises, and other secondary market participants may rely on this appraisal report as part of any mortgage finance transaction that involves any one or more of these parties.

According to the Eleventh Periodic Mortgage Fraud Case Report to the Mortgage Bankers Association, Mortgage Asset Research Institute, LLC 2009, appraisal fraud was the third highest type of mortgage fraud in 2008, right behind fraud in the application and misrepresentations in tax return/financial records. Almost 25% of the mortgage fraud cases reported for 2008 involved misrepresentations in the appraisal. Appraisal/Valuation fraud was involved in 22% of the mortgage fraud cases reported for 2008, as compared to 19% for 2007 and 16% for 2006, according to the report.

According to the FDIC, below is a list of some of the common errors by appraisers.  These errors may be the basis for a lawsuit by the lender or borrower that relied on the appraisal, administrative action by the licensing authority and/or criminal charges.

• Conceals that the original client was the loan applicant
• Accepts a fee contingent on the appraisal obtaining a predetermined value
• Inaccurately describes improvements-overstates square footage and number of rooms
• Misrepresents the condition of property
• Fails to disclose extraordinary assumptions and hypothetical conditions (e.g. does not disclose that the estimated value depends on obtaining a change in zoning)
• Presents faulty analysis (e.g. uses appraisal methodology applicable for higher valued owner-occupied condos when the property is rental apartment units)
• Omits relevant information
• Includes misleading information
• Includes a series of material technical errors that will affect the credibility of the valuation
• Conceals that the original client was the loan applicant
• Fails to follow the Uniform Standards for Professional Appraisal Practice

Effective May 1, 2009, Freddie Mac no longer purchases home mortgages from sellers that do not follow the Home Valuation Code of Conduct (HVCC).  Sellers must also ensure that the appraisals obtained for such loans were made in compliance with the HVCC.

According to the HVCC Fact Sheet, the new HVCC:

• Prohibits lenders and third parties from influencing or attempting to influence the development, result, or review of an appraisal report.

• Requires lenders to ensure that borrowers are provided a copy of the appraisal report no less than three business days prior to closing, unless the borrower waives the requirement. The lender may require the borrower to reimburse it for the cost of the appraisal, but the lender must provide a copy of the appraisal report to the borrower at no additional cost.

• Requires any third party specifically authorized to perform certain actions on behalf of the Seller to be in compliance with the Code.

• Requires lenders or third parties authorized by lenders to be responsible for selecting, retaining, and providing for payment of all compensation to appraisers. The Code does not allow any other third parties to perform these activities.

• A lender, in connection with the loan being originated, may accept an appraisal report prepared by an appraiser for a different lender provided that the lender obtains written assurances from the other lender that it has adopted the Code and determines that such appraisal conforms to appraisal requirements and is otherwise acceptable.

• Requires absolute independence within a lender’s organization between the appraisal function and loan production and limits communication with the appraiser.

• A lender’s loan production staff is prohibited from being involved in the selection of the appraiser, or having any substantive communications with an appraiser or appraisal management company about valuation.

• The loan production staff consists of those responsible for generating loan volume or approving loans, as well as their subordinates. This includes an employee whose compensation is based on loan volume or the closing of a loan transaction. Employees responsible for the credit administration function or credit risk management are not considered loan production staff.

In Sage v. Blagg Appraisal Co., the Arizona Court of Appeals reversed the trial court’s decision dismissing the buyer/borrower’s lawsuit against the appraiser.  In its decision issued April 30, 2009, the Court, for the first time in a reported decision, allowed the buyer/borrower to sue the appraiser, even though the appraiser was hired by the lender.  The Court’s decision opens the door for buyers/borrowers to sue appraisers, even if they did not hire the appraiser or even pay for the appraisal.