Appraiser Talkback Blog

By Richard Hagar, SRA

At American Home Appraisals, we provide extensive expert witness work for a variety of law firms all across the U.S.

When attorneys call and engage our services, we don’t always know if the appraiser is the plaintiff or the defendant. As a result, we sometimes are on the side of the appraiser and sometimes not. We try not to pick sides, we’re simply the experts hired to explain how an appraiser’s report, methodologies or standard of care fits within USPAP and Fannie Mae requirements or the Interagency Appraisal Guidelines. We are the people who try to help both sides understand the appraisal process.

In a series of articles and Webinars for OREP/Working RE, we’ll explain some of the appraisal, AMC and lending failures that I’ve seen over the past year as well as your Rights and Responsibilities in Understanding the New Mandatory Reporting Laws. Hopefully appraisers will learn how to avoid making the same mistakes as many others. Information comes from civil and criminal cases where we were hired as the expert-witness or consultant. So, with that said, please don’t shoot the messenger - I’m just trying to help!

Case #1: One Thousand Appraisals a Year
An appraiser in Arizona was completing 1,000 appraisals a year (2005-2007). He had no staff or other appraisers, just him and his computer working out of his den. A thousand appraisals works out to roughly three per day, every day, including Sundays, Christmas and New Years. (Now that’s dedication.)

In deposition he was asked how he produced so many appraisals. His response was: “I really like appraising.”

Problem
The quality control (QC) department of several banks discovered failures in his work during the initial underwriting phase and a year later during their “after closing” review. You should understand that the loans were not going bad (yet) but the appraisals were being “reviewed” for quality control and he was failing.

The appraiser was placed on the lenders internal black list and the appraiser was turned into the state for disciplinary action. In 2007, the loans started to go into default and the bank losses mounted. Full reviews indicated that the appraisals had problems and incorrect values. A year after closing the loan, the bank was experiencing losses so they sued the mortgage broker for selecting the appraiser and the appraiser for producing substandard appraisals.

In other words, the bank wanted the mortgage broker and appraiser to pay for their loan losses. The suit against the appraiser was for more than $2.5 million (ouch) based upon the failure of 10 reports.

At this point, most states place their official investigations on hold. They wait until the civil actions are concluded before they finalize theirs.

What we found
We were hired by the law firm representing the BIG bank. We explained to the law firm that the appraiser’s value conclusion was not the end-all and be-all. The bigger question is, did the appraiser utilize the correct process in coming to the value? After all, even bad appraisers using a bad process can come to the correct value conclusion. For bad appraisers it’s more of a blind dart throw; for good appraisers it’s accuracy.

The law firm issued the appraiser a subpoena demanding 10 work files. The files were handed over to us and we were asked to see if the work files, methodologies and final report conformed to all appraisal laws, regulations and guidelines. We got to look at the appraiser’s entire work file including every note, diagram, MLS data sheet and Email. That alone would send shivers up the spines of most appraisers.

In reviewing his work we found the following general failures:
1. Bad initial appraisal orders;
2. Incomplete work files;
3. Poor property descriptions;
4. Poor “comparable” selection;
5. Failure to accurately describe the subject;
6. Failure to accurately describe the comparables;
7. Failure to inspect the comparables;
8. No support for adjustments;
9. No support for land value or construction costs;
10. Utilized MLS photographs instead of personally inspecting the properties.

Details and Examples
Example #1
Often, the appraisal orders sent over from the mortgage broker included the term “a minimum value needed: $xxx,xxx.” Upon receiving this type of information the appraiser should have rejected the order and helped the mortgage broker understand the error of his ways. However, the appraiser simply accepted the order and guess what?!! His appraisal came in at the value requested. (Wow what a shock!)

At the appraiser’s trial, how is that going to look to the judge and jury? Random coincidence that the value requested is also the appraised value? It’s going to be tough for the appraiser to say, “I have no bias during the creation of this appraisal.” Really? Convince the jury in two minutes or less! [Read USPAP Advisory Opinion - AO-19.]

Example #2
The work files contained information on three comparables- not four or five, just the three used in the report. So what happened to all of the sales he analyzed prior to filtering it down to the three used in the report? Appraisers, your work files must contain or reference all information that the appraiser uses to reach their conclusion. Since his did not contain the required information, there has been a USPAP violation.

When I receive an appraiser’s work file, I should be able to recreate the appraisal right down to the adjustments, land value and construction costs. Since this appraiser’s file did not contain information explaining how he determined adjustments, how he determined land value and his source for construction costs, his work file was a failure. Yes, he had that boiler plate statement about “obtained construction costs from a book and local builders” blah, blah, blah. However in deposition he acknowledged that he didn’t own the construction cost book and couldn’t remember which builder he talked to as part of this appraisal assignment. His work files were a failure and he was caught making false statements in his appraisals. [See USPAP; Ethics - Conduct and Record Keeping sections.]

Example #3
The “comparables” were all higher in sales price than the subject. The report contained only three sales, all above the subject’s sales price. The only source of sales information was from the builder. There was no additional MLS data.

Right here it looks like there’s a bias in selecting and analyzing the sales. There was no attempt to bracket the sales price. No attempt to look for sales outside the plat or sales where there was an additional information source (MLS). Everything looked biased, which is exactly what we said in our report to the law firm. [See USPAP; Ethics - Conduct section; Failure Standards Rule 1-1, 1-4, 1-6, plus so many more.]

Example #4
How could he produce three appraisals a day? Simple – he didn’t inspect the comparables and he used MLS photographs. How do we know? We matched up the MLS photographs with the photos in the appraisal. Interesting how the shadows match perfectly. If the appraiser had inspected the sales he would have found that several of his “comparables” were condominiums in a gated subdivision, on a golf course- not exactly a perfect match for the subject, which was a detached home on a 7,000 square foot site near an industrial area.

Process
The law firm ordered a forensic review of his computer. We looked at every file and read every email he sent and received (including the attempts at erasing files and email).

Space prevents me from going over all of the failures but there were dozens. Eighty percent of the failures reoccurred on all ten appraisals. While some mistakes are expected, why are the same mistakes on ten appraisals? Why did all of the mistakes result in a higher sales price? In a criminal court this could be shown as “intent” to mislead - fraud.

His appraisal was so bad that our narrative review was 30 pages in length. We included examples along with the applicable USPAP Standards and Fannie Mae requirements. Our reports make it easy for our clients to understand the failures. After reading our review the law firm deposed the appraiser. They went into the deposition armed to the max and ready to skewer the appraiser.

The appraiser was placed in a south facing room, with the air-conditioning set to 85 degrees on a hot August day in Phoenix. For the next seven hours he was asked dozens of questions about his value conclusion, appraisal order, work file and interaction with the mortgage broker.

To this point the appraiser had $85,000 in legal fees, spent days if not weeks producing files, answering written questions, working with his attorney, not working at his job and trial was still months and another $50,000+ away.

Result
In my opinion, based upon the weak appraiser/appraisals and our critical review of his work, the law firm thought it better to settle than risk loss in trial. The appraiser paid close to $1,000,000 to the bank. Who is he? Confidentiality concerns exist so the most I’ll say is that he is one of the people shown on the state of Arizona’s web site for having a “disciplinary” issue. Remember that issue was waiting in the background, which also explains why states take a long time to issue disciplinary sanctions.

My purpose for this series of articles is to provide you with some insight into what happens when an appraiser fails to do the job properly. I also provide numerous classes to help you be a better appraiser. One of your choices in life: education or prepare to face pain.

This time I described some simple appraiser failures. Next time I’ll describe how an AMC instructed an appraiser on what should be included in the report. Who got sued? Well, the appraiser of course. But that story takes an interesting twist.

OREP/Working RE Webinar Series
1,000 Appraisals a Year: Realities of Appraiser Liability
Presenter: Richard Hagar, SRA

Nationally recognized author, instructor and fraud expert, appraiser Richard Hagar, SRA puts a spotlight on appraiser rights and responsibilities. Learn from an appraiser with thirty years’ experience. Richard is a much sought-after expert witness for cases dealing with complex appraisal issues, appraiser liability and the adverse influence of clients on the appraisal process. This series of webinars will help every appraiser provide better quality appraisals and keep safe from the increasing threat of lawsuits. The goals are better quality appraisals and lower liability. To learn more and sign up for Richard’s Webinar, click here.

To learn more about Richard Hagar, check out his resume here.

Due to the response from the story Mortgage Field: Unfair Business Practices?, and the call to create a place to exchange information on possible violations of state and federal laws by large vendors, we’ve created the OREP.org Mortgage Field Blog Page as a place for mortgage field service contractors to share their ideas, experiences and resources. Share your story here and network with other professionals dealing with many of the same issues.

To opt-in to receive Working RE’s online Mortgage Field newsletter, click here.

By David Brauner, Editor

If you are being told which agency to buy insurance from, it may cross the line into a restraint of trade violation, according to small business experts. The IRS may have something to say about it as well.

“I’m really angry at being told where I can and cannot purchase my insurance from,” said one mortgage field services independent contractor who wishes to remain anonymous for fear of retribution in the form of loss of work. “I’m mad because I’m getting lousy customer service and paying more with agencies on the ‘approved list.’ But if I don’t play ball, they will cut off my work. As an independent business owner, I’m being forced to make a decision that is not in the best interests of my company in order to keep getting work. They are exerting too much control over my business and that stinks.”

At least one representative of the Small Business Administration (SBA) – SCORE Division- in San Diego and one seasoned attorney agree that there may indeed be legal issues at play. SCORE provides free expert mentoring and counseling to small business owners under the umbrella of the SBA nationwide.

The representative from SCORE told Working RE that a good first step for the independent contractor is to ask the supplier what the basis for their decision is, regarding the restriction on where they may purchase their insurance. This retired insurance executive from SCORE said that it is not uncommon for vendors to require a certain type of insurance, such as errors and omissions and general liability, and certain levels of coverage from independent contractors, but vendors usually do not dictate who they can purchase it from. This may cross the line into the area of restraint of trade, this expert says. He suggests doing a Google search for any applicable state laws by searching “restraint of trade” and your state name.

One insurance and business attorney practicing over 30 years suggests contractors make an inquiry with the Attorney General’s office in their state and in the state of the vendor to see if the policy is in violation of any laws and if there is any interest in pursuing the matter.

Independent Contractor or Employee
According to the SCORE counselor, the Internal Revenue Service (IRS) may also want to investigate whether the line between independent contractor and employee is being blurred. The IRS has cracked down in recent years with significant penalties and fines for businesses who misclassify employees as independent contractors to avoid paying payroll taxes. The issue comes down to the level of control exerted by the company on an individual, according to this SCORE expert and according to the IRS.

According to the EMPLOYMENT DETERMINATION GUIDE, found on the San Diego SBA website, the determination in this case appears gray. The Guide asks: “Is the worker free to make business decisions which affect his or her ability to profit from the work? An individual is normally an independent contractor when he or she is free to make business decisions which impact his or her ability to profit or suffer a loss. This involves real economic risk, not just the risk of not getting paid. These decisions would normally involve the acquisition, use, and/or disposition of equipment, facilities, and stock in trade which are under his or her control. Further examples of the ability to make economic business decisions include the amount and type of advertising for the business, the priority in which assignments are worked, and selection of the types and amounts of insurance coverage for the business.” The Guide says a “no” answer is one indication that the individual is not in a business for himself or herself and would therefore normally be an employee.

Other questions are: “When a worker is required to follow company procedure manuals and/or is given specific instructions on how to perform the work, the worker is normally an Employee.” And “Work which is a necessary part of the regular trade or business is normally done by employees. For example, a sales clerk is selling shoes in a shoe store.  A shoe store owner could not operate without sales clerks to sell shoes. On the other hand, a plumber engaged to fix the pipes in the bathroom of the store is performing a service on a onetime or occasional basis that is not an essential part of the purpose of the business enterprise. A certified public accountant engaged to prepare tax returns and financial statements for the business would also be an example of an independent contractor.”

The IRS agent we spoke with said you can ask for a “finding” from the IRS on the issue by completing and submitting Form SS-8. This form asks many of the same questions.  Independent contractors working in the mortgage field services industry may find the questions interesting with respect to the amount of control being exerted on their businesses.

For more on the position of the IRS, read: Independent Contractor or Employee? 

You can find the SBA office nearest to you here: http://www.sba.gov/about-offices-list/2 .

About the Author
David Brauner is Editor of Working RE magazine and Senior Broker at OREP.org, a leading provider of E&O Insurance for mortgage field inspectors, appraisers, inspectors and other real estate professionals in 49 states. He has covered the appraisal profession for over 16 years. He can be contacted at dbrauner@orep.org or (888) 347-5273. Calif. Insurance Lic. #0C89873

By David Brauner, Editor

According to the attorneys bringing suit on behalf of a group of appraisers against FNC/AppraisalPort for alleged false advertising and data mining, the suit has settled quietly and its terms prohibit them from comment.

As you may recall, a group of appraisers accused FNC of “intentional misrepresentation, negligent misrepresentation, conversion, misappropriation, breach of bailment and breach of implied contract.” Specifically, they claim FNC built a national database of information about properties using appraisers’ information and now competes with them at their own expense.

FNC denied the claim in court and in a Working RE story (Fall 2007), “Federal Suit Alleges Misuse of Appraisers’ Data by FNC.”

In February of this year, the United State Court of Appeals Fifth Circuit, reversing a lower court decision, allowed the lawsuit to continue. Recently, the suit settled.

The following detail of allegations is excerpted from the February 24, 2011 Court’s Opinion, allowing the lawsuit to continue (WorkingRE.com, Sidebars: FNC Lawsuit Settles): “The plaintiffs in this case have prudential standing primarily because of the zero-sum competitive relationship that exists between them and FNC in the field of real-estate-valuation services. Lenders who use the National Collateral Database would otherwise use the plaintiffs’ appraisal services, FNC was able to create the National Collateral Database only because it stole the plaintiffs’ work product, and FNC’s taking of the plaintiffs’ work product was made possible by the false advertisements FNC ran touting the confidentiality of AppraisalPort. But for the false advertisements FNC targeted at the plaintiffs, the National Collateral Database would not have been able to compete effectively with the plaintiffs’ appraisals. It is the inextricable linkage between FNC’s false advertisements and the plaintiffs’ diminished opportunity to sell appraisals that brings this case within the ambit of §43(a).”

Neil Olson, FNC Chief Legal Officer said, “FNC is delighted that the lawsuit has been resolved and excited to continue to serve our clients to the best of our abilities. We are unable to comment on the terms of the suit as they remain confidential and we respect those terms for both parties involved.”

The firm representing the appraisers is Marzouk & Parry, located in Washington, D.C.

Read the February 2011 Court’s opinion (click FNC Lawsuit Settles).

By David Brauner, Editor

One appraisal company at least has collected monies owed by the now defunct appraisal management company (AMC) AppraiserLoft. How did they do it? They did it by citing chapter and verse of FIRREA.

C. Brent Chitwood, office administrator for Phoenix Real Estate Appraisal in Irmo, South Carolina, says he was able to get a mortgage company to reimburse his appraisal firm for monies unpaid by AppraiserLoft after pointing out that FIRREA requires contracts be with licensed real estate appraisers.

FIRREA, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, targets appraisal reform and includes the establishment of appraiser licensing.

“Initially, the mortgage company told us they would not reimburse us because they had paid AppraiserLoft for the appraisal and that our contract was with AppraiserLoft, not with them. Therefore, they said they were not liable for payment,” Chitwood says. “Our attorney confirmed, however, what we believed. That according to FIRREA, the contract must be with a licensed real estate appraiser and AppaiserLoft is not such an entity.”

According to Chitwood, the argument that a client must pay when an AMC does not is pretty clear under FIRREA and Supplemental Standards.

This is from the correspondence Chitwood sent to the mortgage company: “The issue of responsibility for payment appears to be in question. We are providing you with our research to assist you in understanding our position in this matter and the legal precedence that we will use to pursue collection.

(1) You are required under FDIC Rules and Regulations Minimum Appraisal Standards 323.4 to use a State Licensed Appraiser for this loan.

(2) As state licensed appraisers we are required to identify the client and the intended user by USPAP, the Uniform Standards of Professional Appraisal Practice. This was done by obtaining that information from your agent. The client (you) is documented in the client section of the appraisal that is part of your files.

(3) You are required by law and rule to contract with a state licensed appraiser either directly or through an agent. See 323.5 (b). You may not contract with a party that is not a state licensed appraiser or its DBA. So AppraiserLoft, a regulated AMC, is either your agent or you have violated this provision.

(4) According to The Appraisal Foundation, USPAP Client Issue #93, payment by a party other than the client: the act of the borrower or any other entity paying the appraiser does not make them the client under USPAP. Therefore your position that payment from the borrower to your agent somehow changes the Vendor/Client relationship is refuted.

(5) The transaction took place between Phoenix Real Estate & Appraisal, Inc. as the appraiser legal entity and xxxx Mortgage as the client. AppraiserLoft acted as your agent to order, review and assure compliance with your specific requirements.

(6) You received our product and utilized it to conduct your lending business. You received an invoice stating our (the Vendor) name and address, Your (the Client) name and address, a description of the product, and the amount due. An Invoice is a legal demand for payment.”

After hearing the argument, the mortgage company promptly paid Phoenix the monies owed ($300). “It worked for us and I’d like to see it work for the whole bunch of others who lost money working for AppraiserLoft,” Chitwood says.

Click here to read about another appraiser who isn’t taking no for an answer when it comes to fees owed.

Click here for FIRREA Sections 323.4 & 323.5.

About the Author
David Brauner is Editor of Working RE magazine and Senior Broker at OREP.org, a leading provider of E&O Insurance for appraisers, inspectors and other real estate professionals in 49 states (OREP.org). He has covered the appraisal profession for over 16 years. He can be contacted at dbrauner@orep.org or (888) 347-5273. Calif. Insurance Lic. #0C89873.