By Robert Freedman, Senior Editor, REALTOR® Magazine
You can’t expect much from a single letter but a recent communication from NAR to federal regulators could help shine a light on an appraisal issue that that needs as much light on it as possible. The issue concerns appraisal management companies (AMCs), the middlemen between appraisers and the lenders that hire them. Earlier this year AMCs began rolling out changes to the contracts between them and their appraisers that offload the legal liability over loans gone bad to the appraiser. That means the appraiser who earns about $200 for an appraisal (after the AMC has taken its 45 percent cut of the fee) also has to shoulder the burden if a consumer or the lender or some other party decides to sue.
Appraisers already assume a certain amount of liability over valuation issues, of course. Any time they release a valuation they certify to its integrity, so they already shoulder liability if someone thinks the numbers are misleading.
The AMC indemnification issue goes beyond this by expanding the appraiser’s liability to anything that the AMC would be liable for. As one appraiser told me (in confidence, so I won’t use any names), “the appraiser is responsible if anything goes wrong with the loan, regardless of their culpability for it.”
“Say, for instance, that the loan was not properly underwritten and the borrower defaulted, or the borrower lied on his application and they default,” the appraiser said. “The way some of these indemnification agreements are written the appraiser is put on the hook.”
An example of a contract with the indemnification language is posted on an appraisal industry blog hosted by the Real Estate Advisors Defense Institute. It’s password protected, so you won’t be able to access it unless you’re a member. But there’s some information on it In a blog post there.
To be fair to AMCs, they’re surely under their own pressure from lenders. Big banks are no doubt asking AMCs to indemnify them from liability, so perhaps they’re just passing that pressure along to appraisers.
NAR took up the issue last month with a letter asking HUD and other regulators to review the indemnification language to ensure it doesn’t amount to pressure on appraisers and an infringement on their independence. If “the appraiser bears all responsibility . . . some appraisers may be less than objective in their analysis, [causing] them to be more conservative and report artificially lower values for real property,” NAR says.
The letter went to eight federal regulators, but it’s possible it will have an impact at the state level as well. AMCs have already in some cases made changes to their language to avoid running afoul of state laws governing their business; other states might take notice now that NAR has alerted regulators to the possibility that appraisers’ independence is under pressure.
Issues like this tend to fly below people’s radar screens, but in their own way they have a big impact on whether a home sale transaction gets to closing or not. Given how shaky residential markets are today, the last thing that’s needed is further pressure on an already taxed appraisal industry.