LiveValuation Magazine - May 2010 by David Peck

Beware of Borrower Reducing the Risk of Legal Claims Peter Christensen pg

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The valuation space is all about risk. Lenders think about collateral risk, while appraisers, on the other hand, think about risk on a more personal level. Appraisers are constantly aware of the risks related to their profession. These more personal risks are a common thread found in this month’s edition of LiveValuation Magazine. Our feature article by Peter Christensen addresses the risk of being sued by borrowers, now the most common source of claims against residential appraisers. Tim Forsythe discusses the dangers we face by not bringing new trainees into our profession. Wayne Pugh alerts appraisers to the pitfalls of relying on a mortgage appraisal practice only. Finally, Vladimir Bien-Aime considers appraisal guidelines; do they help or hinder appraiser risk? These articles inform the residential appraiser on how to reduce their personal risks, and, at the same time, invite our community to contemplate solutions to future risks in our industry. Also in this issue, we begin a unique series of articles by a professional home inspector. Mike Connolly will give us a glimpse of what the home inspector experiences while at the same time providing insight to how an appraiser can better determine property condition. Previously, Mike worked for a residential appraisal firm and he will base his five-part series on the different sections of the URAR. As he walks section by section through the front of the URAR, appraisers will

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PUBLISHER’S NOTES

LVM

gain a new appreciation for home inspectors while learning new techniques for determining a property’s condition. A new section appears in the magazine this month, “The Chat Room.” We had an excellent response online to last month’s articles. Readers took the time to write thoughtful (sometimes provocative) comments on our website, and we have decided to print a small selection of these commentaries in each month’s edition of LiveValuation. The comments were numerous and unfortunately we do not have space to print them all; if you would like to read the comments in their entirety, they can be found at www.livevalmag.com underneath the articles. Please remember to provide your feedback on this month’s articles. Let me take a moment to personally thank our advertisers and authors who contributed to the launch of last month’s inaugural issue. We at LiveValuation Magazine are excited about being a monthly voice in the valuation industry.

Ernie Durbin, SRA Publisher ernie@livevalmag.com

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In This Monthâ&#x20AC;&#x2122;s Issue

10 Are the New Appraisal

14 Together We Can Mend our

Guidelines Helping or Hindering?

Broken Appraisal Industry Tim S. Forsythe

Vladimir Bien-Aime

24 Diversification is the Key to Survival and Success

Contents

Wayne Pugh

FEATURE

18 Beware of Borrower Peter Christensen

28 Observations from a Home Inspector Michael Connolly

Peter Christensen explains borrower claims and suggests how to prevent the most common form of claims against appraisers.

34 For What itâ&#x20AC;&#x2122;s Worth James A. Kirchmeyer

LVM page seven

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CONTRIBUTORS Vladimir Bien-Aime Are the New Appraisal Guidelines Helping or Hindering?

Wayne Pugh Diversification is the Key to Survival and Success

Page 10

Page 24

Vladimir Bien-Aime is CEO and Co-Founder of Global Data Management System, LLC, a respected pioneer in appraisal process management since its inception in 1999. Throughout the past 10 years, thousands of prominent appraisal firms, appraisal management companies and lenders have employed the company’s web-based software solutions for appraisal management and workf low automation. Global DMS solutions include the OASISOne Management Platform, eTrac WebForms and the MISMO Appraisal Review System (MARS) PDF to XML data extractor.

R. Wayne Pugh, MAI, CRE is the CEO of R. Wayne Pugh and Company, a real estate consulting and appraisal firm founded in Baton Rouge in 1975. He is a graduate of LSU holding a degree in Real Estate Finance. Mr. Pugh is also the CEO and founder of Software for Real Estate Professionals, where his firm has developed residential appraisal software for the past 27 years. From 2006-2009, Mr. Pugh had the honor to serve as an officer of the Appraisal Institute wherein he served as national President in 2008. Many appraisers also know Mr. Pugh as the author of the Cool Tools column for Valuation magazine. In recent years, Mr. Pugh has also had the honor of chairing the Louisiana Real Estate Appraisers Board.

Tim S. Forsythe Together We Can Mend our Broken Appraisal Industry

Michael Connolly Observations from a Home Inspector

Page 14

Tim Forsythe, CEO of Forsythe Appraisals, LLC, has SRA and SRPA designations and has served on boards for several inf luential industry organizations. Founded in 1940 by his grandfather, Forsythe Appraisals is the nation’s largest independent appraisal firm. Tim’s brother John is president and his sons are branch managers, marking four generations in the family business.

Peter Christensen

FEATURE

Beware of Borrower

Page 18

Peter Christensen is the general counsel of LIA Administrators & Insurance Services. LIA provides E&O insurance to more than 24,000 appraisers and is endorsed by the Appraisal Institute. As LIA’s general counsel, Peter responds to the claims, lawsuits and disciplinary matters affecting LIA’s insured appraisers and investigates and researches emerging legal issues related to appraising.

Page 28

Michael Connolly has over 30 years’ experience in the real estate industry and is owner of Smart Move Inspections in Cincinnati, Ohio. He is a member of the American Society of Home Inspectors (ASHI) and holds their highest designation of Certified Home Inspector (CHI). He has evaluated over 8,000 residential homes for home-buyers, attorneys and lending institutions. He holds licenses for Radon testing, wood destroying organisms inspections and is a HUD fee inspector.

James A. Kirchmeyer For What It’s Worth

Page 34

Mr. Kirchmeyer began his career in the Real Estate Valuation Industry in 1983 as a New York State Certified Appraiser, earning the Senior Residential Appraiser (SRA) designation from the Appraisal Institute. In 1994, Mr. Kirchmeyer founded his own real estate appraisal company. Kirchmeyer & Associates, Inc. (www. kirchmeyer.com), grew from servicing the Buffalo, NY area to include Rochester, NY; Syracuse, NY; and Baltimore, MD, after which, Kirchmeyer & Associates, Inc, (KA) provided their services throughout the entire US with over 6,000 appraisers. KA is an HVCC compliant Appraisal Management Company (AMC).

LVM

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Vladimir Bien-Aime

re the New Appraisal Guidelines Believe it or not, the choice is up to you.

Helping or Hindering? Appraisal guidelines are a lot like speed traps. Although they’re supposed to be catching the “bad guys,” sometimes it seems like all they do is create delays in getting from Point A to Point B. The truth is, however, that speed traps—while inconvenient—are created for a very legitimate reason: because excessive speeds present a real potential for serious injury. In other words, they weren’t created to be nuisances. They were actually created for our protection. While there are different findings on just how many accidents result from excessive speed, one thing is for sure. When accidents do happen, excessive speed can mean the difference literally between life and death—and in many cases, the violator isn’t the only victim.

In our industry, we may not have car crashes, but we certainly have our own danger zones. When a property’s true value is not accurately ref lected on a valuation report, the potential for financial loss is significant. Those losses, which on a micro level can hugely impact the lender, appraiser and investor, can also have devastating effects on the macro level, damaging the mortgage industry, housing

market and both domestic and global economies—something we’ve all witnessed first hand over the past several years. While the consequences of appraisal-related violations aren’t quite as dramatic as fatal or devastating auto accidents, they can put your business on the critical list—if not extinguish it altogether. >>

LVM page twelve The primary difficulty in the appraisal space is that we’ve gone a long time without many stiff guidelines and regulations, and we’ve gotten accustomed to the freedom. To further complicate matters, we’re not dealing with merely one set of guidelines. There’s the Home Valuation Code of Conduct (HVCC), the FHA’s appraisal guidelines, and as of July 2010, there’s the new Collateral Data Delivery program. With new guidelines coming in from seemingly every angle, it’s easy to think that these new rules are overkill. But just remember, appraisal-related fraud was, at the very least, a contributor to the mortgage industry’s current crisis—our equivalent of a multi-car pileup. If these guidelines seem excessive, just imagine what the response would be if we’d just had the most catastrophic and wide-reaching multi-car pileup in history— one that devastated neighborhoods across America in every state in the country—all because no one was minding the roads. Of course we’d respond with tighter rules and regulations. Change is difficult for a lot of folks, but adjusting to the industry’s new guidelines doesn’t have to feel like an awkward and cumbersome imposition. All it takes is a little effort and help from the experts, and you’ll be motoring smoothly toward a safe and successful transaction. A little clarity goes a long way, and in this case, you just might be surprised how simple compliance can be once you get the facts. Let’s look at HVCC and the FHA appraisal guidelines. The most obvious issue is ensuring complete objectivity throughout the appraisal process. That stipulation has gotten a huge amount of press and attention, so virtually everyone in the industry knows about this aspect of the guidelines. But there’s more to these guidelines than creating a barrier between those who stand to profit from achieving a certain value and those who assign those values. For example, there’s also the issue of mandatory timelines. HVCC stipulates that appraisals must be delivered no less than three days prior to closing, and they cannot be ordered until five days after the Truth in Lending documents have been sent to the borrower. These are seemingly minor requirements, yet one day can

mean the difference between a loan that gets sold to investors and one that must be repurchased by the originating company. For lenders, there are two ways to help ensure that your processes address all aspects of these two sets of guidelines. You can either use a reputable appraisal management company or, if you prefer to keep your appraisal process in house, you can use an appraisal process management technology. Whichever solution you choose, you should take the time to find out how compliance is being addressed. If you’re using a technology, choose a system that has controls in place that prevent production staff from ordering an appraisal. As far as assigning orders to your list of approved appraisers, it’s a good idea to choose a system that uses a computer-selected rotation process for designating what orders go to which appraisers. If you choose to use an appraisal management company, find out about the proactive steps the company is taking to ensure compliance. Ask how they ensure that appraisals are sent out in time, and how they track the time delay between the Truth in Lending documents being sent and the appraisal being ordered. Companies, whether lenders or appraisal management companies, should always have a formal compliance process in place. Otherwise, you’re betting on chance. Again, there’s more to these guidelines than meets the eye. Make sure that your provider is addressing all points of the guidelines.

“

Like traffic laws and speed traps, the mortgage industry’s guidelines weren’t created to make things more difficult, despite how cumbersome and inconvenient they may feel. They were created to address the areas of highest risk and highest potential for damage. Because a property’s value is such a major factor in the soundness and performance of a mortgage, it only makes sense to keep an eye on the valuation process and impart rules that help ensure that everything— and everyone—is on the up and up. We should no more turn our backs to potential infringements in the appraisal sector than we should allow reckless drivers to break laws and create accidents in order to defraud insurance companies.

Appraisal guidelines are a lot like speed traps. Although they’re supposed to be catching the ‘bad guys,’ sometimes it seems like all they do is create delays in getting from Point A to Point B.

LVM page thirteen

For appraisers, there’s no way around the use of technology. It’s virtually impossible to conduct business efficiently and compliantly without using specialized software for managing the appraisal process. Whether you’re an independent appraiser or an appraisal management company, your workf low processes should include a software that allows you to get orders without having to speak to the lender’s production staff, monitor the transaction’s status delivery and keep apprised of any upcoming deadlines with plenty of time to comply. Remember, HVCC doesn’t designate that production staff and appraisers can’t communicate; it states that they can’t communicate about value. In the event that you do have to contact an originator or other production staff regarding a non-value issue—for example, if there’s some confusion over the property address—it’s good to have a technology that automatically logs conversations. While it hopefully won’t be necessary, a virtual paper trail can clear up any doubt or confusion as to what was said and to whom, in the event of an audit or investigation. Whether during the process or after a deal closes, there’s no substitute for transparency. In fact, it could literally not only save the transaction in question, but also protect the future of your business. The last thing you’d want is to get f lagged with a violation in this area. The newest set of guidelines for the appraisal industry is the Collateral Data Delivery program, which addresses the way appraisals are formatted. Starting in July 2010, all appraisals submitted to Fannie Mae must be in a MISMO-sanctioned XML format. While just about everyone who owns a computer has heard the term “XML,” few actually know what it is, let alone why it’s important. XML is an abbreviation for “extensible markup language” and it’s basically a format for coding data that’s so universal, it’s accessible by virtually any computer. If you were to look at a computer screen that displayed an appraisal in XML format, you would notice it is actually readable and each element of data has a tag or label describing the data associated with it. The reason all of this is important is because, although Fannie will be requiring all loans to be submitted in this format, it’s not the format in which appraisals are created. Instead, appraisals are customarily created as PDF files, a universally readable format, because several individuals need to review the appraisal throughout the mortgage cycle and exclusive use of coded formats like XML would make that extremely difficult. So the issue is that an appraisal is created in one format, but needs to be submitted in another. Of course, in order to comply with this new set of rules, lenders will need to be able to convert their appraisals from PDF to XML format. Fortunately, this isn’t nearly as difficult or intricate as it sounds. There are conversion technologies available, and they’re usable by both lenders and appraisal management companies. These technologies can extract

data from a PDF and seamlessly convert it into XML format, literally with just a few mouse clicks. This means you can have an XML-formatted appraisal in just a few moments. Lenders can also access conversion technologies on a per-use basis through the Fannie Mae Portal for $5.00. As for appraisers and appraisal management companies, it’s not imperative that you are able to handle the conversion, but it is a great customer service offering to deliver both a PDF and XML formatted appraisal to your lender clients. Like the other appraisal process guidelines, there’s more than one requirement for achieving compliance. For example, in addition to sending the appraisal report in XML format, lenders will also need to submit a first-generation PDF copy of the report as well—copies will not suffice. While there are ways to possibly determine whether a PDF is first-generation or a copy, the best way to make sure you’re meeting this requirement is to know how the appraisal report was created. In other words, you’ll have to address this issue with your appraisers and appraisal management companies. While these points don’t cover every single aspect of all appraisal-related guidelines, they do represent some of the major points. That’s where the final step comes into play. No compliance program would be complete without having an expert on hand. Whether you’re using an appraisal management company or an appraisal management technology, your provider should be an expert, so choose wisely. Providers that actively pursue a thorough understanding of all guidelines offer more than an accessible knowledge base. With these providers working so hard to understand the intricacies of each set of guidelines, you can rest assured that their solutions will accommodate the larger issues as well as any subtleties, changes or less visible requirements that might otherwise get easily overlooked. Based on how the industry is handling other segments, it looks like we can expect these tighter guidelines to stay. As with speed traps, the best way to stay safe is not merely to know where the regulators are going to be looking for violations, but to carry out best practice policies that ensure the safest possible outcome—whether or not someone is enforcing rules. There are plenty of solutions that can help you stay compliant, including outsourcing and technology or a combination of both. Ensuring compliance and best practices can be simplified, but being cautious always takes extra time and effort. The next time you’re tempted to cut corners, you may remember that rushing from Point A to Point B is pointless if your business gets injured along the way.

Together We Can Mend our Broken Appraisal Industry Tim S. Forsythe

Letâ&#x20AC;&#x2122;s begin by accepting the fact that we have challenges in the appraisal industry, such as: l l l l l l

Appraisers are leaving the industry; It is far more difficult to gain entry into appraising today; We have an aging appraiser panel, with an average age of 55-58; There seems to be a never ending downward pressure on ap praisal fees; Appraisers are making considerably less money than they were years ago; and Increased lender requirements require more time and more detail on each report.

| Can We Overcome These Challenges and Create an Appraisal Industry That is Better Than Ever? | The people with whom I spoke last week at the Collateral Risk Network in New Orleans are betting that we can! My grandfather, Al Forsythe, started our company 70 years ago. Over time, we have slowly grown to over 250 full time staff appraisers. As the CEO of my company, and as someone who has helped train a generation of industry recognized high quality appraisers, I want to make sure there is a future for appraisers. But, before we can fix the problems, we need to be brutally honest in assessing the current situation. We are told that the average appraiser is between 55 and 58 years old. My company is starting to lose appraisers who are getting out of the industry, and to make matters worse, we can no longer replace them with trainees because our clients will no longer use trainees.

Over the past 70 years, our company has gone through these economic cycles many, many times. After difficult times there is always a recovery. When it happens, there is usually pent up demand for real estate and mortgages, and appraisal companies become swamped.

The Big Risk

The appraisal industry may have a perfect storm on its hands. Consider the situation when these three realities come together:

1. The lending community has an increased need for appraisals. 2. Aging appraisers have gotten out of the business to retire or go into more lucrative fields. 3. We have eliminated the opportunity for trainees to get into the business. The result is a doomsday scenario. Trust me, the lending industry will not let the lack of appraisers become a bottleneck for something so important to the economic recovery as new mortgages. When this happens, lenders will simply find an alternative to appraisals (AVMs, BPOs, Mortgage Insurance Policies against default, etc). This could be the end of appraisals as we know them.

| I Am Preaching to the Choir | It is the forward thinking appraisers who read publications like LiveValuation Magazine or attend the Collateral Risk Network (CRN) that will solve these problems. In my 31 years in the business, I have seen appraisers lay down their competitive hats and generously work together to improve the appraisal industry. We do a good job of â&#x20AC;&#x153;piggy-backingâ&#x20AC;? off each otherâ&#x20AC;&#x2122;s ideas in an effort to find solutions. I am going to share my thoughts and hope the readers will respond with even better ideas, so together we can avoid the crisis I have described. We need a portal to bring good people into the industry. In the past, trainees have been an exploited group. During good times, many unscrupulous appraisal companies hired eager, well intentioned appraiser trainees. These individuals were not given adequate training. They were thrown in over their heads with too many assignments and not enough quality control. Some of the pain that is being felt today is a result of the irresponsible way trainees were being treated by many appraisal companies. As a result of those abuses, the pendulum has swung way too far the other way; lenders insist on no trainees.>>

I am suggesting a paradigm shift; in the past, trainees have been a weak link in the industry. In the future, we need an industry-wide standard to thoughtfully bring in eager, well educated young people that are technologically savvy. At the CRN conference in New Orleans, I suggested we develop a gold standard for the best appraisal firms in the industry. The better appraisal companies would invite a rigorous independent audit on the firms trainee program; it would analyze the steps taken to screen and hire appraiser trainees. Included in the audit would be continuous in house education programs, rigorous testing, mentoring, and a robust quality control program. If these rigorous standards were met, the company would be given certification and lenders would be asked to allow trainees to be used by that company. Consider the positive implication if your appraisal firm was on the short list of appraisal firms that could use trainees. It would give you a true competitive edge in the business.

| What is the Incentive for Lenders? | Like any industry, some lenders have a commitment to big vision and industry leadership. We need to convince those banks that the industry needs eager, well educated, well trained appraisers if we hope to avoid a looming crisis—which will happen when the appraisal industry does not have the capacity to meet the banks’ valuation needs. We would partner with the better lenders, inviting their participation as we develop the gold standard to certify the very best appraisal companies. Using a restaurant analogy, we would be inviting independent auditors right into our kitchen to see how we train our apprentice chefs.

“

I am suggesting a

paradigm

shift; in the past trainees have

been a weak link in the industry. In the future we

need an

industry-wide standard to

thoughtfully bring in eager, well

educated young people that are technologically savvy.

| A Brighter Future for Appraisers |

Three years ago as the Collateral Risk Network (CRN), Rick Langdon, the Chief Appraiser at Wachovia Bank, shared an exciting vision on the way technology was going to give appraisers more tools in the future. We are going to get away from the monotonous, mind numbing form-filling that we have done in recent years. Instead, appraisers will have a much more interesting and challenging career of analyzing data to help lenders make better lending decisions and thus avoid many of the problems banks are experiencing today. A well educated, well trained work force that cut their teeth on ever changing new technology will be a part of this picture. I asked Alan Hummel, our Chief Appraiser here at my company, to do a nationwide search for new products and opportunities. One of the products he found is the Collateral Valuation Report (CVR). I feel this type of a product is a peek into the future; it is a sophisticated, fascinating appraisal tool that uses regression analysis and other meaningful data. It allows appraisers to do a much more sophisticated appraisal than the 1004 in considerably less time. Best of all, it is an alternative product to BPOs and it is done by appraisers! Like many of the better appraisal companies, we have been asked many times to be a beta site for AVMs. In almost every case, AVMs seem to fall apart when appraising a complex property or a property in a neighborhood that was not homogenous. We have rigorously tested the CVR product at our company. The fact that it holds up and is accurate even on complex properties—when used by a properly trained appraiser—is an indication that appraisal technology continues to evolve and improve. In the future, new high tech products will give appraisers an opportunity to make more money and have a more interesting career. These products will provide lenders with more meaningful analysis done by appraisers as they underwrite loans to more effectively manage their risk. To make this happen, we need to bring educated, motivated people into the appraisal business.

| There is Nothing Like a Crisis | Over the past 70 years, we have experienced the challenges of rising and falling economic cycles. We have found that our best ideas have always come during challenging times. During good times, it is easy; anyone can cut up a warm pie. By working together to meet the challenges, we can avoid what I feel is a looming crisis on the horizon. The appraisal industry MUST have the bandwidth to meet lenders’ needs when (not if) the economy recovers. I am confident the appraisal industry will come together to meet these challenges just as we have in the past; if we don’t, we all lose.

LVM page seventeen

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Borrower

Peter Christensen

of Borrowers are currently the most common source of claims against residential appraisers. Regardless of the fact that they are not the intended users identified in almost all repor ts, borrowers are filing a majority of the lawsuits and demand letters we see against residential appraisers. This ar ticle discusses common borrower claims and suggests how to decrease the risk.>>

Alleged Overvaluation

Square Footage

The single most common claim asser ted by borrowers is that the appraiser overstated the value of the subject proper ty. These claims come mostly from borrowers who purchased or refinanced proper ties near the peak of the bubble and are now in financial distress. Quite simply, more mor tgage defaults mean more claims by distressed borrowers hoping for a financial payoff.

The third most common borrower claim we see involves square footage. These claims usually involve appraisals performed for purchase loans. The borrower typically alleges that the appraiser overstated the square footage of the subject proper ty and thereby caused the borrower to pay too much for a home. The borrower will usually demand an amount for the “missing” square feet (e.g., $200 per square foot times 300 square feet). Alternatively, a borrower will claim that he or she would never have purchased the home at all if he or she had known it was 300 square feet smaller and then demand payment from the appraiser for the entire purchase cost. In square footage claims, the appraiser has sometimes not even made an error in the repor t – the homeowner may be relying on inaccurate information from another appraisal, the owner’s personal measurement or public records. Other times, the appraiser did err and the error results from measuring incorrectly, relying on plans or public records without identifying that reliance, or counting areas that should not be included in gross living area.

Most overvaluation claims by borrowers fit a common pattern: borrowers typically allege that they borrowed or paid too much because the appraiser overstated the proper ty’s value and often also accuse the appraiser of conspiring with the lender to make sure the loan would close. There is always more to the story with these claims, however. When we defend them, we typically discover that the lender overlooked its underwriting guidelines or the borrower’s inability to pay or that the borrower lied to get the loan. And, in many cases, we find that the borrower never even looked at or considered the appraisal until his or her lawyer star ted coming up with par ties to sue and therefore did not legally “rely” on the appraisal.

Sewer versus Septic Alleged Undervaluation On the flip side, a noticeable new trend in the last year has involved complaints by borrowers that appraisers have undervalued proper ties. This trend unfor tunately means that appraisers are being attacked from all sides. Claims alleging undervaluation are usually made soon after the delivery of a repor t and are often intended by the borrower to intimidate appraisers to change valuations or to strike back at appraisers who have repor ted lower than desired values. A typical scenario involves a homeowner seeking to refinance a loan on a proper ty purchased at the peak of the real estate bubble. The appraiser will accurately repor t a current value that in many cases is 20% to 30% less than what the homeowner paid. When the loan officer informs the homeowner that the loan cannot be made and provides the appraisal to the homeowner as required by the HVCC, the homeowner or his or her attorney sends a demand letter to the appraiser threatening to sue the appraiser or repor t the appraiser to the state unless the appraiser raises the value or somehow “retracts” the repor t. Often, we will also see a threat that if the homeowner does not obtain the loan he wants, he will sue the appraiser for the interest that the homeowner theoretically would have saved if the homeowner had received his or her desired loan. In our opinion, most of these claims are frivolous, and we take them as an indicator that appraisers are doing their job and providing accurate information to their lender clients.

Year in and year out, claims about appraisers misidentifying whether a home is on a septic system or public sewer continue to roll in. A common scenario here occurs when several years after purchasing a home, a homeowner encounters a waste blockage and is informed that his or her septic system must be repaired or replaced. The homeowner is shocked by the cost and notices that the appraisal identified the home as being on a public sewer. Now, the homeowner makes a claim against the appraiser for the cost of the septic system repair or seeks the cost of connecting to a public sewer, if available. Of course, the homeowners who make these claims never appreciate the fact that they never had to pay monthly sewer fees.

The other claims that borrowers bring against residential appraisers taper off from here into a creative shopping list. The more frequent of the claims on this list include:

1. Problems with the condition of the structure like leaking roofs, electrical problems or undisclosed damage; 2. Erroneous flood zone determinations; 3. Proper ty line/boundary issues and unidentified easements; and 4. Nearby nuisances such as retention ponds or factories.

lender/client to evaluation of the subject proper ty for a mor tgage finance transaction. The language we see in most repor ts and that we definitely recommend keeping is:

The Intended User of this appraisal repor t is [name of the Lender/Client]. The Intended Use is for the identified Lender/Client to evaluate the proper ty that is the subject of this appraisal for a mor tgage finance transaction, subject to the stated Scope of Work, purpose of the appraisal, and Definition of Market Value. No additional Intended Users are identified or intended by the appraiser.

LVM page twenty-one

Other Borrower Claims

The inclusion of this standard language – acceptable to Fannie Mae – is without question a good idea and does assist in the successful defense of many borrower claims.

A Suggested Claims Prevention Strategy It should go without saying that the first rule in reducing the risk of claims from any source is to do good appraisal work and to disclose and analyze the effect of any specific conditions or anomalies affecting a proper ty. The best disclosure and analysis uses real world language tailored to the specific issue with the proper ty, not canned phrases from a macro key entry. Leaving aside that general advice, the common thread woven into nearly all borrower claims is that the borrower is almost always not the appraiser’s client or intended user. This fact can serve both as a tool for appraisers to decrease their risk of becoming the subject of a borrower claim and as a viable defense when such claims are pursued. The appraiser should not do or say anything either verbally or in the repor t suggesting that the appraiser expects the borrower to use or rely on the repor t or that the borrower may use or rely on it. Most appraisers, of course, include a shor t explanation in their repor ts clarifying who the intended user of the repor t is and limiting the intended user to the identified lender/client. The typical language is included in an addendum and limits use of the repor t by the identified

In square footage claims, the appraiser has sometimes not even made an error in the repor t – the homeowner may be relying on inaccurate information from another appraisal, the owner’s personal measurement or public records.

The other very impor tant language that we see and expect in most repor ts is:

The appraiser is not a home inspector and this appraisal repor t is not a home inspection, the appraiser only performed a visual observation of accessible areas and the appraisal repor t cannot be relied upon to disclose conditions and/or defects in the proper ty. This very standard language also has assisted the defense of many borrower claims. All of this kind of language addressing similar subjects that is currently found in appraisal repor ts is good and sometimes useful in defending against claims.

Never theless, disclaimer-type language in a repor t is not a complete strategy. Borrowers, lawyers and cour ts routinely find ways to ignore an appraiser’s carefully crafted standard language. In many cases, the language will just be cast aside as “fine print” or “boilerplate.” For example, in a recent case in California, the cour t of appeals strained to reverse a summary judgment that had been granted against a borrower who claimed he paid too much for a proper ty because he relied on the opinion of value contained in a repor t prepared for a lender. To over turn that decision, the appellate cour t needed to find a way to suppor t a conclusion that the appraiser reasonably could have expected the borrower to rely on his appraisal despite the exact disclaimers above. The cour t stretched and reached that conclusion by observing that the borrower was identified in the repor t:

While the disclaimer contained in [the appraiser’s] appraisal repor t is evidence that he did not intend third par ties to rely on the repor t and his opinion as to the value of the proper ty, [the borrower] presented evidence from which intent may be inferred. [The borrower]’s name appears repeatedly on [appraiser]’s appraisal repor t, identified as “borrower” . . .

For that cour t, just having the borrower’s name in the repor t was enough evidence to suppor t a finding that the appraiser could reasonably expect the borrower to rely on the repor t and to disregard the traditional language, limiting use of the repor t to the lender/client. With decisions like that, there is little wording that can be placed into a repor t that will fully insulate the appraiser from borrower claims. To take your risk avoidance to the next level, what we suggest is twofold and does require some extra effor t. An appraiser should also be ready to customize and add to the following suggestions to better fit the appraiser’s individual practice and context.

Refinance Loan Appraisals For appraisals performed for refinance transactions, we suggest that the appraiser who wants to fur ther reduce the risk of a borrower claim develop a routine procedure of providing the borrower with a standard form on the appraiser’s letterhead informing the borrower of cer tain key matters or, even more ideally, develop a very shor t questionnaire for borrowers to fill out while the appraiser is conducting his or her inspection and have the homeowner sign the questionnaire. This strategy works with refinance appraisals because the borrower is typically present for the appraiser’s inspection. The language we suggest for the appraiser’s information sheet to the borrower is to the effect of:

I have been hired to appraise your proper ty for the lender. Even though you may pay an appraisal fee or later receive a copy, the appraisal repor t that I will prepare is for the lender’s use only. You should not use or rely on my appraisal for your own purposes. If you require an appraisal for your own use or are concerned about your proper ty’s value or any conditions which may affect your proper ty, you may engage an independent

appraiser of your own choosing. The Appraisal Institute, the National Association of Independent Fee Appraisers, and the American Society of Appraisers [other resources can be named] are professional appraiser organizations and have on-line resources to help find an independent appraiser in this area. Because of my duties under the Uniform Standards of Professional Appraisal Practice and other regulations and guidelines, I cannot speak with you about the results of my appraisal assignment. If you later have any questions or comments regarding my appraisal you should contact the lender. Thank you. The appraiser can adjust or tailor this language to fit the appraiser’s own practice. If language like this is used in an appraisal information sheet, the appraiser should try to be consistent in following that practice with every refinance appraisal and keep a copy in the work file with a notation that the appraiser delivered it at the time of the appraisal. An even stronger approach is to include the language in a shor t questionnaire filled out by the borrower with a few “easy” questions like “has the proper ty been listed for sale in the last 12 months” or “have any additions been made to the proper ty without building permits?” The advantage to this approach is that the appraiser will then have a document signed by the borrower indicating the borrower’s receipt and also have another source of backup in his or her file

(though the borrower’s responses should not be relied on exclusively). Some appraisers also like this approach because it occupies the borrower’s attention while the appraiser conducts his or her inspection.

Purchase Loan Appraisals The challenges are greater in developing a similar approach with appraisals for purchase loans. Here, the appraiser typically does not meet the borrower and we do not suggest that the appraiser separately send or make contact with the borrower. To do so only invites misunderstanding and

miscommunication. Thus, the appraiser is limited to language contained in the repor t itself (including addenda) and to any extra attachments. Finally, the appraiser is challenged by the fact that AMCs or lenders may oppose the appraiser’s attempt to include non-standard language or extra attachments. We do not suggest that the language of the above advisory be incorporated into the repor t itself or into any formal addendum that is par t of the appraisal repor t. Fannie Mae and cer tain lenders would likely object to this. Instead, we suggest that appraisers seek to include similar language as a separate attachment to the appraisal repor t in the same way that an appraiser may attach his or her license or resume. It may be entitled “Appraisal Information for Borrower” and printed on plain paper and attached at the end. Some lenders and AMCs may object and ask the appraiser to remove it – the appraiser can adjust his or her practices in view of such business realities and try to keep the page in repor ts for other clients. A few lenders and AMCs may even remove it from the repor t themselves, but that will not decrease its effectiveness entirely. If the appraiser has a record in the work file of transmitting it with his or her repor t, that information will be strong evidence that the appraiser had no intention or expectation that the borrower would rely on his or her repor t.

N O

V I D

KEY survival to

R E

I S

C I F

I is the T A

SUCCESS

Wayne Pugh

oday, the vast majority of real estate

appraisers choose not to pursue a professional designation. This suggests that most appraisers, along with many of their clients, are content with the competency driven by the minimum qualifications established through licensure and certification. Certainly, all of us are required to meet varying continuing education requirements, however, most CE does not raise the bar nearly as significantly as the advanced qualifying education necessary to earn a professional designation. Would it make more sense to seek the more advanced professional development needed to complete assignments involving more complex valuation problems? For most fields of practice, it is the specialist that consistently experiences stronger demand and higher rates of income. >>

Professional advancement offers the opportunity of a more diverse practice. Ask yourself, “Should I continue to focus the development of my business around mortgage lending clients?” Certainly mortgage lenders could make up a portion of your practice, but, aren’t you at a much greater risk when the vast majority of assignments are coming from a single industry, especially one that is so subject to increasing federal regulation and the prevailing economic climate? Would it instead make more sense to develop a more diverse practice? Please allow me to digress. A number of years ago, before Congress passed the Financial Institutions Reform and Recovery Act (FIRREA), professional designations played a significantly more recognized role. Since the enactment of FIREEA, everything has changed. The population of real estate appraisers has grown significantly since the 1990s. During this period, education qualifications and testing were set to low standards, and in many cases, supervising appraisers were not meeting their responsibilities. With the booming economy of the 1990s and early 2000s, no one seemed to care. I do need to credit the Appraisal Foundation for recognizing the need for higher standards and significantly raising the qualifying requirements in January of 2008. Unfortunately, though, the gate was open for too long and far too many real estate appraisers entered the profession under the lower initial standards. The dilemma now centers on how to correct the problem. The professional integrity of each and every one of our firms is at risk—doing nothing is not a viable solution. The most important question is “Given the recent changes to the management of

appraisal procurement, are you content with the future prospects of your career?” If not, “What can you do?” The answer lies in upgrading your professional credentials. Join a professional association. There you will be able to expose yourself to the information and services that will help you reinvent your skills, no matter which path you choose. Of the several associations that sponsor the Appraisal Foundation, the Appraisal Institute has the largest membership with over 25,000 members, and the largest education curriculum, educating over 55,000 students worldwide in 2009.

bottom line of your financial statement. Forty-two percent (42%) of the SRAs surveyed in 2009 earn more than $100,000 per year as opposed to fifteen percent (15%) for non-members. u

he Latest Industry Trends at T Big Savings. The Appraisal Institute offers more than a thousand courses and seminars, including up-to-date topics such as valuing green buildings and how to appraise in declining markets. Also, many of these courses have a members-only 20 percent (20%) discount, and you will have access 24 hours a day to the Appraisal Institute’s extensive online library, free of charge. The Site-ToDo-Business Online Lite is a free service to members that provides excellent demographic data for most any referenced geography in the US.

owerful Professional Advice. P The Appraisal Institute’s membership counselors can help you through the process of

Consider the benefits of association membership and make a sound investment in your career. Sharpen your competitive edge with access to education and networking opportunities. Obtaining a designation shows your clients that you have gone above and beyond the education and experience needed for state certification and demonstrated the highest level of professional knowledge, understanding and ability.

Just check out this partial list of benefits. You will see how the value of the associate and designated Membership in the Appraisal Institute can far exceed the membership cost. u

ignificantly Increase Your S Income. Improve your professional development while earning your SRA or MAI designation. Surveys consistently prove that a designation will pay off on the

Build your plan to include expanding your professional skills with more advanced educational offerings, and reach out to others that can help you expand your sphere of experience. It all begins with the first step.

ppraisers Directory Listing. A Associate membership automatically gets you a listing in the “Find an Appraiser” online directory, which is featured prominently on the Appraisal Institute’s home page, and receives more than 30,000 visits each month. Each appraiser has the opportunity of listing their specialties of practice by business services or property type. Just one job order can pay your annual dues.

Government Relations on Steroids 24/7

LVM

One of the most important roles the Appraisal Institute plays is in the area of government relations. Many have spoken of “unifying the appraisal profession”, but here, the Appraisal Institute’s actions walk the walk. For most of the past decade, the AI Washington Office has executed and managed joint government relations agreements with three of the largest professional appraisal organizations in the profession, including the American Society of Appraisers, American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers. Those efforts form a coalition with more than 35,000 appraisers and approximately 90 percent (90%) of all professionally affiliated appraisers in the country. Through direct representation in the halls of Congress and federal agencies, to coordinating state government relations efforts in state capitols, the AI Washington office has successfully advanced the interests and concerns of professional appraisers. Most appraisers never know how active and effective the Government Relations Committee (GRC) is on a daily basis. Within the Appraisal Institute, the GRC is the hardest working committee, communicating on important matters every day of the week. Congress doesn’t wait, so neither can they.

Get Connected And Take Control Of Your Future. Add it up, and you will find that joining a professional association connects you to a variety of benefits that empower your appraisal business with knowledge, information, networking relationships, and much more. Get connected and see the difference. I did, and I assure you the old adage, “You just don’t know what you don’t know” is as meaningful today as ever.

“

onnect With Top-Flight C Appraisal Professionals. When you join, you also get membership in an Appraisal Institute local chapter — there are more than 90 in the United States. This gives you excellent networking and referral opportunities to help build your business. Many members feel this is one of the most valuable benefits they receive; getting connected with other appraisers in your market area can help with referrals, advice, and market data.

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When you add up the benefits, like those above, the value of joining a professional association far outweighs the cost. But, realize that is just step one. Build your plan to include expanding your professional skills with more advanced educational offerings, and reach out to others that can help you expand your sphere of experience. It all begins with the first step. Don’t wake up every day thinking today is going to be just like yesterday. Scan your market, make your plan, and adjust it as needed and you will prosper when others don’t.

page twenty-seven

meeting state-licensing, certification, and designation requirements. The Professional Practice Hotline is ready to offer you expert counseling on issues surrounding appraisal practices and USPAP requirements. These services are free, but only available to members. Have a professional question? Just make a call and discuss your problem with a designated appraiser that can offer you the advice you need to help solve your problem.

bse

ervations Home Inspector from a

Michael Connolly

In a prior life, I spent ten years working for a prominent Midwest appraisal firm. Between this experience and running my own home inspection business for the last 16 years, I have found that inspectors and appraisers share some common issues. I have acquired a special appreciation for the similarities and differences between them. Mostly, our professions are related through the real estate process (perhaps cousins, twice removed)—we both visit the house and ascertain the general condition of the property. I read Steve Papin’s article in the April edition of LiveValuation, entitled “Joe Appraiser”, and chuckled at his descriptions of inspecting the property and avoiding “Fido’s droppings”. Inspections and appraisals share the pitfalls of evaluating a property. For example, after setting off an alarm in a home, I once spent 30 minutes in the back of a police cruiser until the police were able to confirm that I had permission to enter the home.

Most people believe that a home inspector just evaluates the home and reports its condition to our clients—but not many people realize the true purpose the inspection serves in the real estate process. It provides affirmation. Yes, affirmation. Hypothetically, if a buyer has contractually agreed to purchase a home, they are most likely in love with it and the surrounding neighborhood. They want the house! They hire a home inspector to uncover any issues, but hope there are none. The client wants to be prudent and protect their personal interest, thus they are happiest when their inspector tells them the home is in good condition with limited deficiencies. Ultimately, they want the inspector to shake their hand and congratulate them on their purchase: affirmation. Of course, in order to satisfy our client, we, as inspectors, must be diligent in our evaluation of the home. We must use all resources available to provide a thorough analysis of the property. Home inspectors fill out a variety of inspection forms to report their findings. Unlike the appraisal industry, there are no national standard inspection forms. It may be interesting to see how an inspector addresses sections of the appraisal form URAR 1004. In this article, I will use the URAR as a general outline of points in order to demonstrate some of the tricks and techniques used by a home inspector during the inspection process.

Section 1: SUBJECT Property Address:

by state regulation, the home owners had to fill out. Internet searches may also reveal listings of the property, both active and prior, that have valuable information concerning the age of major systems such as roofs and furnaces.

Assessor’s Parcel Number:

In my market, it is easy to look up a property tax record and description from the county auditor. Besides the usual information on square footage, there can be some valuable information gleaned from the records. For instance, a tax card might list a family room addition to the rear of the property, which was built in 2001. From this I can assume the addition was completed with the benefit of a municipal inspection and therefore probably met the local building codes at the time of construction. At the property, if I notice the roof on this addition is in the same shape (condition, color, style) as the roof on the main house, I could conclude the age of the roofs are 9 years old. Knowing an asphalt shingled roof in my area lasts approximately 20 years, this roof probably has 11 remaining years of service life. If the main house roof does not match and appears to be older, then it may have a lower remaining service life. But, if I arrive at the home only to find there is an addition which was not listed on the tax card, then I can assume it was built without a permit and inspections from code officials. I would then closely evaluate this addition and disclose to the client that it may have been built without a permit.

Neighborhood Name:

I often “Google” the address of the subject property to see what shows up. I once found that the subject property I was searching had suffered a fire in the previous year. (Many fire departments now publish fire reports and any emergency runs to a specific address.) Of course, there was no mention of this in the property disclosure form that,

“

Like the appraiser, a competent inspector should have knowledge of his market. Issues and complaints about neighborhoods can relate to the subject property. One neighborhood in my market has a history of moisture intrusion through the brick into the wall cavities. This is related to the quality of construction done by the builder who built out this subdivision. When I accept an assignment in this neighborhood, I know to take special care to evaluate the home for moisture intrusion and to look for any signs of related repairs. It is also helpful to know the history of storm damage in neighborhoods. Homes which have suffered tornado or hurricane damage can significantly effect the structures. Some of this damage only manifests itself months or years later. I inspected a home in a neighborhood where, five years prior, a tornado had destroyed several homes in the neighborhood of the subject property. The subject property had newer siding and windows, which I was able to confirm were five years old. I could assume this house had sustained some tornado damage, so with that knowledge, I closely evaluated the roof structure from the attic space. I found that part of the roof structure had lifted in the tornado; the roof had not blown off, but had lifted several inches causing a failure of the truss connection plates. This was a major structural defect, which I would not have known to evaluate without the knowledge of the local market area.

“

Occupant:

Tenant:

I am always happy to speak to a tenant, as they love to tell you everything that is wrong with the home, including both current and past problems. Do not underestimate the tenant as a source of information on the condition, maintenance and issues with the home, even though they donâ&#x20AC;&#x2122;t own the property.

Vacant:

A vacant house may not have its utilities on line. No one is running the showers and sinks, or f lushing the toilets, making it hard to detect plumbing leaks. There is no one living there to tell you about the condition or issues of the home. However, these properties are often unfurnished and easier to inspect, as you can see all wall and f loor surfaces. I always pay close attention to the lower living areas of the vacant home

for leaks, both in the plumbing and the foundation. In a vacant home, these leaks can go undetected for long periods of time causing extensive damage and mold growth. It only takes 48 hours for mold to start growing after a moisture event.

LVM page thirty-one

If the owner is the current occupant and is in the home when I arrive, I will interview them concerning any known issues with the property as well as the age of the roof. I specifically ask about moisture intrusion issues located in places such as roofs and basements, as these can be difficult to detect if it has been dry for some time. Often, when directly asked about the last time their basement leaked, owners will tell you. Of course, they try to downplay the extent of any such leakage (it only occurs during the 100 year f lood). Armed with such information, I can closely scrutinize such areas. Furthermore, owners will tend to move their stored items and furniture in the basement away from damp areas. If you see a cleared area in the basement while other areas contain furniture and stored items, a moisture problem is probable in the cleared area.

As with many situations, safety is a concern for the inspector in a vacant home. A vacant home means there are no phones, no one in the home to call out to for help, and perhaps other perils. I once unlocked a home and started an inspection, only to find a homeless person sleeping in the attic. He had a pallet and a couple of buckets and was surprised to see me; I donâ&#x20AC;&#x2122;t know who was more surprised, him or me, but I did not stick around too long to find out. I always take extreme care when inspecting a vacant house. This means I have my cell phone on my person, and I call my office to let them know I am entering a vacant home (at least they know where to start looking if something happens to me). Once, while in a vacant home, I shut a bedroom door to look at the wall behind the door. When I went to open the door, I found the lockset was defective and myself locked in the bedroom of a vacant home with no way out. Fortunately, I had my cell phone to call for help and was freed from my detention two hours later. Now, I never close the door from inside a roomâ&#x20AC;&#x201D;it is advisable to always leave a means of egress. Next time I will discuss how the inspector evaluates the neighborhood and how observations on the drive into the neighborhood can give clues to the condition of the subject property. The neighborhood provides a wealth of information for the inspector who takes the time to evaluate the condition and age of the surrounding houses. It is time well spent.

| Joe Appraiser |

CHAT

LVM

Responses to Last Month’s Articles

“This week I closed my shop. I have been in the business for 13 years. When I have looked at my income it has gone steadily down for the past 5 years. Fees have remained stagnant and the past few years declined. Costs of escalated, requirements have increased, picky underwriters asking for ridiculous explanations have abounded. They expect you to be accessible 24/7. They order a report on Thursday and want it done on Monday. They want responses to corrections done in 4 hours. They want the report 24 hours after the inspection. It has become madness and made the business miserable. This past month an AMC told a friend they are cutting fees $70 per report. He figures he’ll lose 8,000 a year if that happens. Solution: Cut corners. This is a business model that is unsustainable, and thus I asked myself, “Can I continue to do this for another decade?” The answer was a resounding NO! I spent 11 years building a business that provided a good income for my family. In one unlegislated act my clients were ripped from me and thus my income. Thankfully I found another job. Good-bye for now. I fully expect BPO’s to be the staple. Look at what is happening in Nebraska where brokers can now do valuations for lenders. But I know people that do BPO’s and their life is really miserable. Talk about slave labor. The system we have is totally broken and appraisers in the next 10 years will be scarce as older ones retire and few enter into it. Then lenders will start using BPO’s again. Thus history will repeat itself via the savings and loan crisis”. ~ WI Appraiser

| The War on BPOs: I Think I’ll Sit This One Out | “I happen to know the author and as he stated in the Blog he has worked in all sides of the valuation industry as an appraiser, BPO provider and user of valuations. I also have had the pleasure of being a loan officer, default manager, BPO provider and AMC provider. The point he made about willingness to change and offer alternative products is essential to the future success of the appraisal industry. Yes, for all intents and purposes, appraisers are the best trained and should be the final stop as experts in the valuation industry. However, the users of alternative valuations are not going to start ordering $300-$500 products when quality is only slightly improved. And in fact, the majority of clients don’t take the BPO at face value. They employ experienced valuation experts and come to their own conclusions with all the information provided. Like many of you, I have had it with the industry on both side and am moving on to a different segment of the mortgage and banking business, CLEANING UP OU MESS - ASSISTING THE FDIC CLOSING BANKS. Stay tuned”. ~ Bank Closer

| Re-Engineering The Appraisal Process, Are We Ready Yet? | “You have some good ideas. Getting them implemented may take a miracle, like the single means of communication. Would be great, but doesn’t seem likely to happen easily or quickly. The portals out there aren’t going to simply bow out to make things easier for the mass. We all agree the appraisal fee should definitely be separate from the AMC fee. Below, Acuara mentions the time it would take to do the extra work & it is a valid concern. We do a thorough job with our analysis. To defend our work on the front end against possible AVM considerations by the lenders, will also add valuable time. There are no easy answers here. I hope for a smoother process too. Maybe a few years from now, some of these ideas will have come to be common business practice. We can hope anyway. Looking forward to more articles from LifeValuation Magazine”. ~ Deb

| What Does The Future Hold For The Professional, Competent and Ethical Real Property Appraiser? | “I recently gave up my practice and went to work for a corporation due to the changes that have taken place in the appraisal profession. There are appraiser’s from all over the country that have taken jobs with this company for the same reasons you mentioned in your article. I have decided to keep my designation for at least 1 more year to see if there are any positive changes, I’ll never give up my certification. I used to take a lot of pride in my work and the quality of the reports I completed, but the last couple of years it seems that all the lender wants is what they need to make the deal work and the turn time is ridiculous. And lets not forget to mention the fees they expect us to work for. I thought your article was right on the mark and very timely. Appraisers must unite or things won’t be changing any time soon. I appreciate the opportunity to get this all out. Having to go to work for a corporation was something I had never even thought of”. ~ Jacq

| Data Standards Empower Appraisers | “So, MISMO is trying to standardize the appraisal reporting and transmission format to take advantage of the most current data management technology. If that were all they were trying to do, there would be nothing wrong with that. However, the medium is the message and there is a danger that (once again) the message will be grossly misinterpreted and the medium misapplied. Everyone (i.e. lenders, appraisers, regulators, consumers) needs to bear in mind, this automation only standardizes and speeds up the appraisal report delivery component under the RESPA - it does not speed up the appraisal process”. ~ Mlssra

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LIA Administrators & Insurance Services 800.334.0652 www.liability.com

Relocation Appraisers and Consultants 972.658.9216 www.rac.net

Smart Move Inspections 513.896.5434 www.smartmoveinspections.com

For more information visit our web site at: www.RAC.net

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