AMCs & Lenders Fighting…

Trade Secrets Battles of AMCs & Lenders Relating to Valuation Technology

…Battles over alleged misappropriation of trade secrets relating to residential valuation technology and services…

AMCs and Lenders Fighting Over Next Generation Valuation Products and Technology

The residential valuation business for mortgage lenders has been taking big steps lately toward wide scale replacement of the historical Uniform Residential Appraisal Report (URAR or 1004) form used in mortgage lending. As this movement happens, some would-be providers of replacement valuation products (such as “hybrid” appraisals) and automated valuation models (AVMs) are fighting over technology turf and trade secrets.

There are currently three big legal battles over alleged misappropriation of trade secrets relating to residential valuation technology and services. Here’s a synopsis of the three battles:

  1. HouseCanary v. Title Source Inc. (TSI Appraisal) and Quicken Loans. In this battle, appraisal management company TSI — now named Amrock — had been a customer for HouseCanary’s developing AVM technologies. The fight began in 2016 with TSI first suing HouseCanary in Texas state court (Bexar County) for breach of contract. TSI sought to get out of its contract with HouseCanary; its president recently explained in a public statement that TSI wanted out because “Amrock never received any working software from HouseCanary, instead receiving wireframes and half-developed apps that were completely unusable by the company.” HouseCanary, however, sued back contending that TSI actually had stolen HouseCanary’s AVM technologies. After a seven-week trial, a jury sided with HouseCanary and awarded the company $706 million in compensatory and punitive damages; the result was widely publicized because of the sizable sum. What has been less reported is that on March 16, 2018 — two days after the Texas verdict was entered — HouseCanary expanded the fight by suing TSI’s affiliated company Quicken Loans in a new lawsuit filed in the U.S. District Court for the Northern District of California, alleging basically the same story of trade secrets theft. That’s probably a good legal strategy because the $706 million verdict in the Texas case may eclipse TSI/Amrock’s net worth several times over. A rough measure of the defendant company’s value might be drawn from the fact that CoreLogic paid $122 million to purchase Bank of America’s AMC subsidiary Landsafe Appraisal. The Texas verdict may thus be difficult to collect against TSI/Amrock. Considering the $706 million number itself, I do think it’s way over the top of any rational amount based on the actual revenue that I observe at this time for residential AVM products; based on what I see, AMCs in general don’t make any real money selling residential AVMs. The “tools” simply aren’t worth that much right now as revenue producers or in the market place, and a damages demand based on hoped for future value should be viewed as speculative. HouseCanary plainly had great lawyers (Susman Godfrey LLP) and clever experts. TSI/Amrock is seeking to “nullify” the jury’s verdict and also has vowed to appeal.
  2. Collateral Analytics v. Xome, Nationstar and Quantarium. On January 2, 2018, and after an out-of-court mediation had failed, an AVM technology company Collateral Analytics filed suit in the U.S. District Court for the Northern District of California against three related companies: Nationstar Mortgage, its subsidiary appraisal management company Xome Settlement Services, and an affiliated technology company named Quantarium. In a story pretty similar to HouseCanary’s, Collateral Analytics alleges that Xome had obtained detailed proprietary information about Collateral Analytics’ AVM products as a customer and contends that the three affiliated companies misappropriated the trade secrets to develop their own AVM business. Here’s the basic story as alleged by Collateral Analytics in its complaint: “while Collateral Analytics was working to delight its customer, Nationstar and Xome were secretly plotting to use what they learned from Collateral Analytics’ industry-leading tools — all while deceiving Collateral Analytics both about that copying and the fact that they intended to replace Collateral Analytics with copied products.” If Nationstar and Xome think they are at potential risk for a verdict against them resembling HouseCanary’s, the expedient solution may be for them to buy Collateral Analytics itself. In a recent case management statement to the Court, Nationstar and Xome posited that they’d like to engage in further private mediation because “it allows for creative solutions.” Perhaps a buyout is what they have in mind.
  3. (Clear Capital) v. ComputerShare. On April 6, 2018, Clear Capital sued Computershare Inc. in the U.S. District Court for the District of Colorado. Clear Capital alleges that one of its own former senior vice presidents took an array of proprietary material with him when he left Clear Capital for a new position at an upstart AMC created by Computershare called Property Solutions. The alleged trade secrets range from vendor panel data and customer information to specific product information. There is some interesting storytelling in this complaint too. For one thing, Clear Capital says it was partly tipped off to the alleged theft by an anonymous informant. Another way that Clear Capital says it was tipped off was that it had created email address “honeypots” — monitored email addresses set up and secretly planted in Clear Capital email lists to detect whether someone might be misusing the email list. Clear Capital alleges that one of these honeypots started receiving solicitations from Property Solutions, suggesting to Clear Capital that the email list had been taken over to the upstart AMC. The full complaint can be read here. (If we learn one thing from this trio of cases, it might be that every business with customer/vendor email or mailing lists should imbed some secret honeypots in the lists.)

Clear Capital’s case isn’t the first AMC case, and certainly won’t be the last, to allege that stolen trade secrets included the AMC’s vendor data (i.e., databases of the agents/brokers, appraisers or other service providers signed up with the AMC to provide services as a independent contractor). It’s a situation that usually results when a lender decides to cut out the AMC by misappropriating the AMC’s information. In a 2001 case, for example, a company managing BPOs and appraisals named Cartel Asset Management sued its former customer Ocwen Federal Bank alleging that Ocwen had systematically copied the names and contact information for vendors performing BPOs and then started using that re-created list directly. Ocwen allegedly had a contest among its employees giving a prize to the employee who copied the most vendor data. A jury returned a verdict of $4.9 million in compensatory damages plus $3.9 million in punitive damages for the trade secret theft – though this result was later modified following appeal. (The Tenth Circuit’s Order is also here.) While not stating a specific monetary demand in its complaint, Clear Capital points to a much larger number, alleging generally about its trade secrets that “misappropriation of Clear Capital’s portfolio and proprietary network . . . could be a loss worth hundreds of millions of dollars.”

What’s to be learned from all of this fighting about the next generation of valuation products? I don’t know who is actually right in any of these cases; moreover, when TSI/Amrock sued HouseCanary first, it was HouseCanary that ended up with a big judgment in its favor. The results are difficult to predict, and just because a company files a case doesn’t mean there is actually anything there. Regardless of who may be right in each case, however, the very existence of the heightened level of litigation about valuation technology means that purchasers (lenders and AMCs) need to be careful about the origin of the new products and services they are considering. These cases don’t just exist in the residential arena — there are cases relating to commercial valuation technology and trade secrets as well. It’s a big investment by lenders and AMCs when they configure their systems around a new valuation product; before spending that time and money, they probably need to do some diligence about the provenance of the underlying technology. Otherwise, lawsuits like these — or perhaps patent lawsuits — might just yank away the latest, greatest or cheapest valuation product offering. These tech-based valuations are on a whole new playing field, but some of the players don’t realize it yet.

The other thing to be wary of is that some providers of next generation valuation tools are not like the old firms you’ve dealt with in the past that developed inside the appraisal profession itself. I’ve observed that investor-backed entrants are extremely aggressive when it comes to shifting liability or accepting responsibility in general. They also hire better trial lawyers. Does it scare you, as a customer, that a supplier of newly developing valuation products could persuade a jury to award $706 million against its own customer? (Albeit that a jury concluded the customer had misappropriated secrets.) I’ve also seen some truly awful contracts signed by AMCs and firms for the next generation stuff. The risks and liabilities were quite a bit more straightforward when a bank bought an appraisal from an appraiser.

Peter Christensen
Peter Christensen

Peter Christensen

Peter Christensen is an attorney, licensed in California and Washington. His legal practice primarily serves the real estate valuation community - Valuation Legal. He's the author of Risk Management for Real Estate Appraisers and Appraisal Firms, published by the Appraisal Institute.

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16 Responses

  1. Avatar Jack Of All Trades says:

    So glad that I’m in the midst of bailing out of the so called appraiser profession ….gee whiz I mean seriously it doesn’t take a crystal ball to see where we are headed.

    • Retired Appraiser Retired Appraiser says:

      It didn’t take a crystal ball in 2009 either yet 90% of the “profession” made the decision to lend the undertaker a hand in their own burial.

      • Avatar Jack Of All Trades says:

        You were 100% correct at the time retired, I wish I could of got out back then, I remember you saying the exact same thing at the tail end of 2008.

  2. Baggins Baggins says:

    Great article with an even better ending. Separation from loan production rules seem to have been more of a power grab than anything else. It’s just simpler to use an appraiser, for appraisal services. Lenders take note, developing an in house distribution department with a reliable appraiser panel is quite simple compared to the complexities involved with amc engagement and alternate valuation product exploration. Avm’s have valid use, on the side, best used outside and apart from the actual appraisal development process. Thank you.

  3. Avatar Jeff says:

    Well maybe the AMC will burn itself down with lawsuits and over stated importance. What data could they possibly have that is so secret or they feel they actually own. Hmm very interesting. Maybe this will set the stage for everyone to realize who owns what data and how it should all be handled. Doubt it

    • Baggins Baggins says:

      Related, things are changing. ZeroHedge, refi’s hit 10 year low. The 7 year build up is over, 2012 is not coming back. What good is all that data to automate the process, if the consumers are not buying? Appraisers with trainees will scramble, they will understand why we did not train. We’re talking 1/6th volume from 5 years ago, less waivers fnma estimated at a tenth of total volume, less avm and other exceptions for qualified borrowers, probably another quarter, and if they raise demins, cut the remaining volume in half again. We’ll have to change the narrative back to there are no deals going through rather than there are not enough appraisers… Amc’s know this though, they’ve been poaching and consolidating in a desperate bid, trying to sub previous volume with avm income. Amc’s have been playing everyone like masters of illusion. Also some fresh stories of notable mortgage origination department contraction. Buckle up, consolidated groups will be the first to go.

  4. Avatar TruthBTold says:

    I invite everyone to re-post to all your social media outlets. The headline I’m using is:

    “Behind the scenes greed, at the financial expense to  the general public, and their right to transparency”

  5. Avatar Jeff says:

    The regulatory committee should be held accountable for allowing the industry that once was productive and respected to be exploited and infiltrated by special interest groups that have no respect for the process and are only concerned with controlling the industry or getting their piece of the pie

    • Baggins Baggins says:

      Revolving door. Paid lobbyists. Industry written regulations. You’re living in the past, big government is bad government, it just perpetuates the cycle. They sure are good at regulating away the competition though, and regulating in taxpayer backing.

  6. Avatar J Connor says:

    Just wait the pendulum will swing back the other way…there is always a need for a whipping boy….ya can’t beat up a computer

  7. Avatar J Connor says:

    another bust is on the way….100% chance most of the loans have no appraisal….the blowout will have us all swamped again….been at this for 45 years and they have not got rid of us cockroaches yet….logarithms ain’t opinions and they cannot testify.

  8. Avatar Pat says:

    Lord God Almighty,

    please let me live long enough to see a resolution to all this horse hockey.

  9. Avatar Brian says:

    I got an E mail today from Amrock with a $5,000 signing bonus to join them. I was like, who the hell is Amrock?? And this can’t be good for me.

    Clear Capital trade secrets? hahahaha!!! Send out mass e mails from “DO NOT REPLY” adresses with the lowest of lowball fees and the report is due yesterday with 100 retarded stips. There, CC can try to sue me for $100 million. What a joke!

    My lifeboat is being lowered down right now and I will be off this sinking ship soon. I always told myself that if I can make it past 2009-2011 that things would get better. They did for a little while. But the ship is taking on water and I don’t see a plug that we appraisers can put in this massive hole that is only getting bigger every day.

  10. Good info Peter, and yet in ALL of these legal battles no one thinks it important that appraisers professional work product is being stolen and used for unintended purposes at all levels.

    FNMAs own website notes that they have over 29 million appraisals in their data base and depend on new ones to update it.

    OHFA recently produced a working paper citing 30 million appraisals…of which about 18 million are non duplicates. Corelogic is featured throughout. The same CoreLogic that controls upload portals to UCDP.

    FNMA has gone far beyond the original assurances that OUR professional work product was not being used to perform reviews of appraisers work quality. That is exactly what is happening now. They are also using routinely using prior appraisals for new loan transactions…that were never intended or authorized. by the appraisers.

    Technically this unintended use could put appraisers in conflict with SR2. What about expanded liability? You do an appraisal that has errors, OR no errors but extremely limiting conditions of value. First loan is made. No problem. Property is flipped 7 to 9 months later and a PIW is issued. Those very stringent assumptive value conditions are never know by new buyers. They default. Does FNMA NOW have recourse the your appraisal that was used for that transaction without your authorization?

    Worse, and this is where consumer fraud may enter the picture; FNMAs own website says a PIW may also be used for a new sale transaction even if neither of the new borrowers were part of the original transaction where the appraisal was obtained.

    So, I make and offer; pay for an appraisal and then for whatever reason I don’t buy the house the appraisal I PAID FOR may now be used for completely different borrowers to buy the same property without paying for their own appraisal or reimbursing me for mine? Read the fine print on FNMAs own website folks.

    Depending on what’s convenient at the time, FNMA claims that less than 5% of property qualifies for PIW…yet here we see it is less than 12%. Eventually I imagine the citation will be “Less than 100%”.


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AMCs & Lenders Fighting…

by Peter Christensen time to read: 6 min