Frivolous & Retaliatory 3rd Party Lawsuits
Appraisers are routinely coerced & intimidated by third parties to violate their independence and integrity…
Honorable Committee Members:
We are writing to add our voice to that of the Massachusetts Board of Real Estate Appraisers (MBREA is a State Coalition of professional real estate appraisers) in support of each of the above bills.
The American Guild of Appraisers is a Guild within the Office Professional Employees International Union (OPEIU) of the AFL-CIO, representing the appraisal and real estate related financial consumer / taxpayer interests of over twelve and a half million AFL-CIO Family Union & Guild Members; their families, retirees and our real estate appraiser members in America.
These include many who are Massachusetts voters & taxpayers.
HB 216 provides much need protections from frivolous and retaliatory third-party lawsuits. Real estate appraisals performed under USPAP clearly state and define who the clients and authorized parties are that may legally rely on an appraiser’s service.
A common misconception is that a borrower “pays for the appraisal” & is therefore entitled to rely upon it. No borrower ever pays an appraiser direct for an appraisal in a federally regulated transaction. It is prohibited.
Nor do borrowers choose or contract with the appraiser. No appraiser has an opportunity to explain assignment conditions or limitations to a borrower before they accept an assignment. In most cases assignment conditions discourage them from discussing the appraisal with a borrower afterward even if they were so inclined.
No appraiser has an opportunity to negotiate with a borrower over the fee or intended scope of work. Federal laws and regulations (specifically TRID) which embodies TILA, & RESPA disclosures; require that the lender or the lenders agent quote a fee for appraisal related services at the time of the loan application. This is well in advance of when any appraiser has had an opportunity to review the property for assignment complexity.
Consumers always pay the lender (bank) direct; or their selected agent. Agents are usually Appraisal Management Companies (AMCs).
When banks are paid direct, they collect (typically) $650 – $750 from a borrower and deceptively call it “the appraisal fee”. They first deduct their own administrative or processing (so called added junk fees) charges, and then pay their agents in thirty to forty-five days.
Their agent (AMC) has a preset contracted fee for which they provide management services for the lender. It is an expectation that the AMC will deduct their own fee (typically $150 to $350 or more) from this amount; & eventually pay the appraiser what’s left over
Since the AMC is driven by pricing motivation, the lower the fee they can get an appraiser to accept, the more they get to keep for themselves. They often undersell the complexity of the assignment even though FIRREA and Dodd Frank obligate them to assure appraiser competency and experience in advance of assignment the appraisal.
In the end, the borrower has neither paid an appraiser for an appraisal nor does he or she know how much the appraisal even cost. That information is obscured from the borrower by the lender and AMC despite being prohibited under Dodd Frank; often forbid the appraiser from including invoices with the appraisal or other wise telling a borrower how much their fee is.
At no point has the borrower paid for an appraisal. At no point have they entered a contractual relationship with the appraiser. They have contracted with the lender to compensate the lender or their agent for lender required appraisal related services in a form and format dictated by the lender and federal & state regulations; whereby the lender and or their agent often garner more than 50% of total fees paid.
A properly performed USPAP compliant independent appraisal frequently results in value indications contrary to the views or perceptions or desires of borrowers; sellers, buyers, loan officers, real estate agents and others that are dependent on commissions or motivated by personal benefit. That is the whole point of an appraisal. To develop independently supported, credible opinions of specifically defined value types under specifically defined conditions for specifically defined ownership interests that exist in accordance with specifically outlined procedures and principles.
Appraisers are routinely coerced and intimidated by third parties to violate their independence and integrity. Most have learned how to say “no” to these actions, but third parties are now routinely using the state board complaint process to find insignificant ‘technical omissions’ in order to support future civil lawsuits against appraisers Errors and Omissions Insurance (E&O) to recoup imagined losses.
At its least dishonest level this amounts to prohibited retaliation under Dodd Frank, and future intimidation of appraisers. At its most common practice outright lies and fabrications by unauthorized parties (the sellers or borrowers rather than the client or a specifically intended user) are used to hustle E&O insurance settlements that they know will not be defended. Leaving the appraiser’s reputation damaged and often subject to sanction by state regulators for unrelated, insignificant clerical omissions in their work files. In addition to forcing the appraiser to spend tens of thousands of dollars out of pocket to defend themselves (E&O does not pay for defense costs).
Only the actual identified client or a specifically named and identified intended user should have standing to sue an appraiser; or to even have a complaint processed beyond an initial screening process to identify standing. It’s reported that 70% of all complaints are of the frivolous third party non client type by people that had no right of reliance on the appraisal.
Another category of offender exists. That is the lender themselves or their agent acting at their direct request or inferred standard policy of forcing an appraiser to change or modify conclusions so that a loan can fund. Less common than the unintended user category, this is still a commonplace occurrence in American lending today.
It accounts for most of the other 30% of complaints. Lenders rarely if ever complain when a loan funds. They only complain when it does not. Because there is no effective enforcement in any state of Dodd Franks independence (or even C&R fee provisions) requirements there is almost no deterrent to lenders that do this (or their AMC agents).
House Bill 216 remedies these conditions and we urge its favorable consideration.
Senate Bill 123: When FIRREA 1989 (Federal Public Law 103) was passed most states required all appraisals to be performed by licensed appraisers following USPAP. Exceptions were brokers who were able to perform CMAs or BPOs strictly for the purpose of trying to list a property correctly. State Assessment and probate referees were often exempted.
Over time the language of FIRREA and most states implementing legislation was challenged. The term (for which licensed appraisers were required) “Federally Regulated Transactions” allowed loopholes by which non appraisers could claim appraisal expertise without regulatory control.
Accountants with business valuation expertise could continue to claim expertise as real estate appraisers even though the two disciplines operate differently and 180 degrees opposite each other. (Without going too far astray, the accountant’s perception is the value of the specific income stream generated using assumptions no appraiser could ever argue; and the appraiser’s approach is to value the total real property and not only it’s income production ability).
As state’s licensing laws aged and or were modified more non licensed “appraisers” or unqualified people falsely claiming to be able to give accurate value estimates, price opinions, marketing values and so forth joined the mix. As many euphemisms for providing the purported equivalent of an appraisal as the human mind could conjure were created. Some states prohibited this. Many did not.
Enter Computers and algorithms. Zillow’s “Zestimate” is probably the most infamous of these. Where or when a property is close to the statewide or other large regional median price, their algorithm captures about 50% to 70% of the most significant property characteristics, and then estimates a price of value that is sometimes as close as 95% accurate. More coincident than property specific. The two main flaws are the arbitrary reallocation of the unidentified 30% to 50% characteristics, and the unreliability/ inaccuracy of raw databases.
In most instances, Zillow, RealAVM (Corelogics), Realtor.com and all the other AVM regression based “values” (which are never defined) can vary by as much as $400,000 to $790,000 for the same exact property at the same point in time! In many dozens of specific experiments in my own high-volume market where good (or reasonably good) data is readily available I have found a result within 5% of real value based on the property’s public records data only one time.
Oddly, in that sample (my neighbors recently sold house) public records were off by 1,000 sf of living area due to unrecorded but permitted additions. Had they been considered the value could have been $100,000 +/- more. A range of $450,000 to $550,000.
The seller’s out of area agent that used such an automated service had no idea the price was low. My new neighbor freely admits he ‘stole’ the property at full asking price.
One of the two consumers in that specific transaction was clearly not well served by spurious valuation services. These value variations are common across the United States. The error rate and specific amounts vary from property to property.
The one thing they have in common is that the more unique or complex a property is, the less likely anything other than a real appraisal performed to at least the minimum standards of appraisal as outlined in USPAP will accurately identify its market value at any given point in time.
As a former Senior Real Estate Appraiser in the IRS Large Business & International Division I can categorically state that non appraisers rarely get values correct. More importantly, unlicensed appraisers cannot provide “Qualified Appraisals” of specific real estate in support of any estate or tax return form. This is especially true of non-cash charitable donations where IRS Form 8283 is required to be signed by the licensed (qualified) appraiser. IRS has adopted USPAP in its entirety.
A qualified CPA performing a valuation of an entity interest in a portfolio of real estate is not harming the public or operating outside their discipline. A software designer claiming to do the same would be.
ALL AVM regression based ’valuation’ products fail [source FHFA White Paper on Alternative Valuation Products], and all unlicensed value providers that rely solely on them also harm the public.
Brokers advising a single client what their specific property may bring, to [credibly] obtain a listing pose no abnormal risk. They provide a valuable marketing service that includes much more than pricing. On the other hand, they should not be permitted to ‘appraise’ foreclosed or pre foreclosed properties for lenders via BPOs where there is virtually no indication or evidence that lenders will elect the BPO Broker for the actual listing (most have policies in place prohibiting this). The compensation is simply not enough for credible results.
SB 123 remedies most abuses and misrepresentations of valuation products for consumers. We urge the Joint Committee to support it.
We also add our voice in support of HB 1114 AMC Licensing Bill.
Respectfully submitted on behalf of our membership
Michael F. Ford, AGA, GAA, RAA, SCREA, Realtor®
American Guild of Appraisers
Chairman NAPRC /V.P. Special Projects
AGA Office 301-377-0099