Appraisal Quality Control is No longer Optional for AMCs

The recent FDIC lawsuits against two appraisal management companies highlight the need for AMCs to be performing quality control reviews of their appraisals. In early May, the FDIC filed lawsuits against both LSI and Core-Logic alleging that these two companies performed sloppy appraisals which led to losses at Washington Mutual of several hundred million dollars. The FDIC is still evaluating many more claims against AMCs for appraisals delivered during that same time period to other failed lending institutions. There is little doubt that the FDIC will be filing additional lawsuits against several more AMCs who delivered faulty appraisals to failed lenders at some point in the not to distant future. It is also reasonable to anticipate that several AMCs may discover the professional liability insurance policy which some of their appraisers carry excludes claims made by the FDIC. In late 2010 in response to the failed lender-bad loan crisis a few E&O insurance providers began limiting appraisers coverage for prior acts. Given the current climate, pending litigation, and other issues it should be obvious that if AMCs are to survive and thrive in the future, they need to become proactive in terms of obtaining quality appraisals in order to reduce their risk and hopefully their liability for poor quality appraisals. A pro-active AMC appraisal quality control program starts with a thorough vetting of an appraiser prior to adding him or her to their appraiser panel. Currently, many AMCs hold the mistaken belief that vetting an appraiser means visiting the ASC website to ensure that the appraisers name with his current license status is listed. Unfortunately even if an appraiser has committed repeated multiple USPAP violations in his home state and even if those USPAP violations resulted in thousands of dollars of fines, unless that appraiser actually lost his license, more often than not, that appraiser will be listed no differently than an appraiser who has a perfect record on the ASC site. It is worth noting that many of the eAppraiselIT appraisers whose appraisals serve as part of the basis for the current FDIC lawsuit had prior disciplinary histories with the Florida appraisal board prior to undertaking their work for eAppraiselIT. AMCs must therefore take the time to thoroughly check each states appraisal board records even though it frequently means reading each states appraisal board newsletters month by month or quarter by quarter for the last ten years in order to be able to pull the individual appraiser disciplinary histories. After an AMC has completed the initial vetting for an appraiser panel candidate, the AMC needs to continue to monitor that appraisers state appraisal board disciplinary activity to ensure that appraisers competency. Quality control at an AMC also means that the AMC will not pay its appraisers unreasonable compensation because doing so precludes its access to a large pool of good appraisers. While I concede the definition of reasonable fee varies depending upon who is defining it, I think we can all agree that the $250 or $275 which some AMCs pay is unreasonable. Is it really all that surprising that LSI, one of the worst offenders in terms of appraiser compensation is one of the first AMCs to be sued for poor quality appraisals by FDIC? When Francois Gregoire, a forensic appraiser, was asked about the appraisers

employed by the AMCs whose appraisals were the basis of the FDIC lawsuit, he responded, I dont think they(AMCs) can claim they have the cream of the crop. Quality control for an AMC also means ensuring that an appraiser has adequate to prepare a quality appraisal report. Without doubt, however, the most important aspect of an AMC quality control program is performing a review on each and every appraisal prior to delivery to the lender. While at first blush reviewing every appraisal might seem like a significant burden to an AMC, in actual fact it is not. Quality Mortgage Services, a nationwide company which provides quality control and compliance solutions has recently introduced ADDP Appraisal Defect Detection and Prevention. ADDP is an automated appraisal review report which can provide an AMC a thorough appraisal review at a low cost per transaction. How good is ADDP? Lets look at one of the specific examples cited in the FDIC lawsuit against LPS (LSI) in which an appraiser valued a property at $2.3 million resulting in WaMu approving a $1.8 million loan on which the buyer defaulted and WaMu was left charging off $1 million. Among its many issues, the appraiser failed to address whether the 6,000 square foot home was overbuilt for the neighborhood which consisted entirely of homes ranging from 2500 to 3500 square feet. An ADDP report would have flagged the homes nonconformity because ADDP provides a homogeneity and conformity report on not only the GLA, but the price per square foot, lot size, and bedroom count. ADDP then provides a comprehensive breakdown of those same categories, so you know exactly where in that range the property falls. Similarly, ADDP would have detected the appraisal error in the example cited by FDIC in it lawsuit against Core-Logic. In that example, a Florida condominium was appraised at $3.2 million which resulted in WaMu approving a $2.6 million loan. The appraiser however, failed to disclose that very condominium had been sold the day before for $1.98 million and two years earlier for $1.6 million. The borrower defaulted leaving WaMu with a $1.2 million loss. An ADDP report would have alerted Core-Logic that the property had been sold two years earlier for $1.6 million because ADDP provides a 25 year sales history for the subject property. ADDP also provides recent and historical comparable area sales as well as current listings, up to twenty! It provides distressed sale indicators showing past, current, and pending foreclosure and other distressed sale activity in the area. ADDP also includes an AVM component showing the low, average, high and median sales prices for property in the subjects neighborhood and alerts you if the appraised value varies from Valuesights median value by more than 10%. ADDP also performs a comprehensive regulatory and risk review on the appraisal. With technology such as ADDP available to AMCs there is no excuse for delivering a nonreviewed appraisal report to a lender.