The appraisal profession has been changing over the last ten years as the economy, real estate market, demographics and laws have changed. Residential appraisers, especially, contend with more requirements, client requests and an increasing amount of work required for each appraisal. This article intends to highlight two of the many issues facing the profession and what is being done to protect appraisers.
Frivolous Lawsuits: Appraisers across the country have been subject to lawsuits from parties never intended to receive their appraisal report. While some states have enacted laws precluding persons who are not intended users from suing appraisers, Massachusetts does not yet have a law protecting appraisers.
Appraisers have no control over who receives a copy of an appraisal report once the report is submitted to the client. Report copies are commonly provided to third parties to fulfill the requirements of disclosure laws and for information purposes only. As noted in USPAP, simply receiving a report copy does not make someone a party to the appraiser/client relationship. Yet, claims are frequently made against appraisers by third-parties who are outside the appraiser/client relationship.
The MBREA has compiled a list of suits brought against appraisers by third parties. We found that when third-parties have brought complaints, courts have consistently found in favor of defendant appraisers yet they must still bear the financial and reputational damage associated with defending themselves.
The MBREA has been working to get House Bill 1975 passed to address this situation. House Bill 1975 clarifies who is a party to the appraisal by affirming that only those individuals defined by the appraiser as “client” or “intended user(s)” have the right to pursue legal actions and complaints against the appraiser. House Bill 1975 does not affect the legal rights of the client and intended user(s), it simply aims to reduce the number of unnecessary lawsuits and protect the rights of appraisers.
Waiving Appraisal Requirements: Recently both Fannie Mae and Freddie Mac introduced lending programs that waive all appraisal requirements for certain purchase money mortgages. The agencies are competing with each other to increase market share and it is highly probable the use of appraisal waivers will grow, much to the risk of harm to consumers and the financial markets. With these concerns in mind, the MBREA recently met with a staffer for Senator Warren and explained the risks posed to consumers, lenders, and the financial stability of the secondary market when the next downturn in the housing occurs in the hope that Congress will ask the agencies and the FHFA to clearly identify the extent to which appraisal waivers will be used and their associated risks.
Specifically, we presented the numerous areas of concern, some of which are discussed below.
A. Appraisers are the only ones involved in real estate transactions who are independent and unbiased. Everyone else has something to gain if the transaction closes. It makes no sense to remove the one independent voice and replace it with a data tool that can include flawed data, and is can be manipulated by those who will gain if the “number” is hit.
B. Public record data is yesterday’s data. Housing markets are very cyclical and using public record data to project today’s property values is a prelude for calamity. Appraisers observe not only past transactions, but also emerging market trends to determine the stability of house prices and market value. Appraisers are able to supplement an analysis of historical sales by recognizing marketplace factors such as increased marketing times and available inventory, increases in the number of listings with price reductions, the prevalence of seller concessions, and new listings reflecting a lower pricing threshold, just to name a few.
C. Fannie Mae and Freddie Mac (GSEs) have a vested interest in increasing their loan production. One approach to meeting this goal is to make origination of individual loans quicker and cheaper without concern for any risk of loss and consumer protection. Loans without appraisals will be pooled and securitized by the GSEs then sold off to investors without recourse to either the GSEs or the originating lender.
D. The GSEs will be relying upon an estimate of value provided by the originating lender. If this estimate is found to be acceptable utilizing the GSEs computer modeling, the GSEs will acquire the loan and waive all recourse against the lender for a default caused by a collateral issue. Under this scheme originating lenders and the GSEs, all of whom have a financial incentive to close every loan possible, put consumers in harm’s way as there is no valuation of the property beforehand by an appraiser who is required by ethical standards to be impartial, objective and independent.
E. The GSEs will be relying on multiple listing services (MLS) information and other public records. Public record data is consistently found to be flawed. For example, data maintained by municipal assessors frequently carries inaccurate measurements, outdated property descriptions, room counts, lot size, etc. Appraisers know not to rely on these data sources without independently verifying their accuracy and the legality of unrecorded, unpermitted improvements.
Multiple Listing Services (MLS) data often relies on municipal data. When appraisers research data found in MLS, they can find errors related to facts about the property that may have been based on these incorrect data sources or input errors. Furthermore, the condition stated in the MLS description does not always match the actual condition of the property.
The waivers will heighten the risks to consumers and the housing market by relying on potentially biased and inaccurate information and removing the one voice meant to ensure integrity and accuracy. The aim of the MBREA is to maintain appraisers’ critical role in the lending process.
Appraisers need strong advocates to protect their interests and defend their profession and these are just two examples of action being taken by the MBREA on behalf of appraisers. Joining the MBREA supports your interests and includes you in a professional community committed to excellence. On behalf of the MBREA, I urge you to consider the future of your profession and what we can do, together, to maintain its strength going forward.
Marcus Johnson, MAI, MRA, is the 2017 president of MBREA, and vice president, The Appraisers Group, Belmont, Mass.