Who Has Been Suing the Most Appraisers? Two Names You Know. Two Names You’ve Probably Never Heard.
These are four of the parties who have been suing the most appraisers in 2011-12. I suspect most appraisers won’t recognize two of the names, unless the appraisers are defendants in one of their cases. The parties are in no particular order, but the last one does file the most lawsuits.
LSF6 Mercury REO Investments
This is an investment fund of a private equity company named Lone Star. LSF6 bought discounted mortgage debt from bankrupt CIT Group in 2008. In late 2011, LSF6 began suing appraisers in New York as part of what appears to be an experiment with mass appraiser litigation to recover damages from appraisers relating to the defaulted mortgages. Most of the mortgages and appraisals at issue date to 2005 to 2007. So far, LSF6 has sued at least 50 individual appraisers and small appraisal firms in New York. LSF6, however, has lost some of its early New York cases or been forced to abandon others. Its masterminds made some obvious legal mistakes. Perhaps seeking a new testing ground, LSF6 filed one of its most recent lawsuits against an appraiser in a Western state. If LSF6’s experiment with mass appraiser litigation pays off for its private equity investors, the appraisal industry will have a dark future of voluminous appraiser litigation.
Lehman Brothers Holdings, Inc.
This company hardly needs an introduction. It is the financial services firm commonly blamed for the near destruction of our economy in 2008. So, what’s this former giant doing suing individual residential appraisers? Well, one of Lehman’s mortgage origination machines at the height of the real estate and mortgage bubble was its subsidiary Aurora Bank. Lehman acquired mortgages from that subsidiary and packaged many for sale to other parties. Though it filed for bankruptcy in 2008 and remains in bankruptcy, Lehman began filing sporadic negligence lawsuits last year against appraisers who appraised for loans by Aurora back in 2005-2006. These lawsuits have been filed or threatened against appraisers in California, Colorado, Florida, Georgia and Tennessee (to name a few states). Lehman filed its most recent lawsuit against an appraiser last week in Michigan.
Heritage Pacific Financial
This entity is an investment vehicle of some type that purchases defaulted mortgage debt for pennies on the dollar and then tries to recover some of the debt through creative means. One of its strategies has been to sue the borrowers for fraud, not just breach of the debt instrument. Because insolvent borrowers rarely fight in court, Heritage Pacific often obtains default judgments against the borrowers without a fight. A judgment for fraud can be non-dischargeable in bankruptcy and thus potentially will remain collectible against the borrower forever (a judgment can be renewed perpetually in California) or as long as judgments are enforceable. The judgments are then either collected on or sold to third parties according to marketing literature from Heritage Pacific. In the last couple of years, Heritage Pacific also has tried suing appraisers for professional negligence and misrepresentation, contending that the appraisers are liable for the unpaid loan balances — though Heritage Pacific may only have paid pennies on the dollar for the already defaulted debt.
With respect to its borrower actions, Heritage Pacific is facing at least one class action for unfair debt collection practices. Separately, it has been subject to state action for alleged securities violations concerning its investment offerings. The Center for Investigative Reporting’s California Watch published a report on Heritage Pacific earlier this year (Texas firm targets Calif. homeowners with foreclosed 2nd mortgages).
Federal Deposit Insurance Corporation
The FDIC’s tear against appraisers continues unabated. From January 1, 2011 through today, it has sued approximately 140 individual appraisers and small appraisal firms relating to defaulted loans of failed lenders under its supervision as receiver. It has identified approximately 400 additional individual appraisers by name as grossly negligent in its two lawsuits against national AMCs. Most or all of those 400 appraisers recently received a document entitled “notice of claim” which purported to give notice that civil claims for damages would be made against them relating to the appraisals in the FDIC’s two AMC lawsuits, but the notices do not appear to have come from the FDIC. Almost all appraisals that the FDIC is suing over date to 2005 to 2007. Some appraisers in high risk states now have E&O policies that exclude coverage for damages awarded to the FDIC. The FDIC, acting as receiver for failed Amtrust Bank, filed its most recent lawsuit against an appraiser in September in Ohio.
The FDIC’s litigation tactics against appraisers also have been questioned. It has been using a law firm called the Mortgage Recovery Law Group to make demands on, subpoena and sue appraisers across the country. The firm is staffed by personnel formerly employed by Indymac Bank, which itself failed and is under FDIC receivership. One attorney in the FDIC’s law firm held the title “Director of Quality and Fraud Risk Management” at Indymac. A non-attorney staffer formerly employed at Indymac held the title “Vice President of Fraud Prevention and Loss Mitigation.” In some cases, these law firm personnel play the role of a witness for the FDIC; in other cases, the law firm’s lawyers represent the FDIC as attorneys. Some might think the FDIC’s utilization of former management insiders at the failed bank is clever, but other people may think it’s repugnant that former insiders are now profiting from their management work in Indymac’s pilothouse, while others are being sued for it. In one of its cases (not handled by the Mortgage Recovery Law Group), the FDIC is suing two appraisers — husband and wife — over appraisals done years ago. The husband appraiser is now deceased and the wife appraiser has dementia. It really is the FDIC against “mom and pop.”
I could add a few regular lenders to the short list above as suing a fairly high number of appraisers and a couple lenders do sue more often than others, but it’s not really newsworthy that appraisers’ named lender-clients sue them and the lenders actually don’t sue very often as compared to their mortgage volumes.
Does it seem like commercial appraisers have been left out? They should not feel that way. First, in recent months, the FDIC and its outside law firms have begun suing and sending subpoenas to more commercial appraisers. Second, the litigation described above is merely the most frequent, not the most severe. As written about elsewhere in this blog, the three biggest appraisal negligence lawsuits currently pending concern commercial appraisal work.