Real Estate Appraisal Nationwide Industry Standard Practices and Procedures Important in Banking Litigation
Renowned nationwide banking, lending, and mortgage banking expert witness, former high-level banking executive, high-level banking regulator, and banking consultant to over 80 banks Don Coker explains some of the important nuances of nationwide banking industry standard policies, practices, principles and procedures of the real estate appraisal industry as they relate to mortgage and banking litigation.
When a mortgage loan secured by real estate goes bad, the borrower often sues the lender claiming a faulty appraisal on which the lender based the loan.
Lender Owes Borrower No Duty on Appraisals
A real estate appraisal is a critical element in the analysis and underwriting of a loan that is secured by real estate. In recent years, borrowers and investors who have had a real estate investment go bad resort to suing the lender claiming that the lender is responsible for insuring the quality of the real estate appraisal that it used in underwriting and approving the real estate loan.
A typical case of this type usually sees the Plaintiff referring to a “duty” owed by the lender to the borrower verify the accuracy of the appraisal on which the lender based its underwriting and approval. However, it has been my nationwide experience that a lender is not held to owe any duty to its borrower beyond the terms of the loan agreement, and no loan agreement in my experience of over forty years has created a duty of a lender to a borrower to verify the accuracy of an appraisal.
Not only has it been my experience that a lender has no duty to a borrower regarding the accuracy of real estate appraisals, it is usually the case that the lender is damaged by a faulty appraisal that undermines the lender’s reliance on the value of the real estate collateral.
Lenders Rely on Appraisals
Generally, real estate lenders rely upon a loan-to-value cushion as at least a portion of their protection against loss, and sometimes as virtually their entire protection. Even if a lender makes 100% loan-to-value loans, the lender still assumes that rising property values over time will provide some value cushion in case something goes wrong with the loan.
Traditional lenders, such as banks and mortgage banking companies, also rely upon the creditworthiness of the borrower, their income and their other assets when evaluating a loan. Given the added comfort of a borrower’s credit worthiness, these traditional lenders will often lend from 80% up to 100% of the value of a real estate property.
In the case of alternative lenders – sometimes referred to as private money lenders - their business model is to rely almost exclusively on the value cushion provided by the excess of the collateral property’s value over the loan amount. Then if a problem develops with the loan, the collateral can be liquidated, and the lender’s investment recovered. The alternative lender’s lower level of concern about the borrower’s creditworthiness is offset by the value cushion offered by the excess of the property’s value over the loan amount. The thinking is that the borrower’s creditworthiness may turn out to be less valuable than originally thought, but the value of the property should hold up to cover any potential losses that the lender my encounter. Therefore, it is very important that the real estate appraised values that are provided by an appraiser to an alternative lender are accurate.
Requirements for Appraisals
In order to insure that appraisals are accurate, lenders of all types look for professional designations that guarantee that the appraiser has met certain known professional qualifications in terms of training and testing.
In addition, lenders require that appraisals conform to the Uniform Standards of Professional Appraisal Practice (“USPAP Standards”) that are promulgated by The Appraisal Foundation, and must contain a certification signed by the appraiser that essentially covers these elements:
I certify that, to the best of my knowledge and belief:
● The statements of fact contained in this report are true and correct.
● The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions and are my personal, impartial, and unbiased professional analyses, opinions, and conclusions.
● I have no (or the specified) present or prospective interest in the property that is the subject of this report and no (or the specified) personal interest with respect to the parties involved.
● I have performed no (or the specified) services, as an appraiser or in any other capacity, regarding the property that is the subject of this report within the three-year period immediately preceding acceptance of this assignment.
● I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment.
● My engagement in this assignment was not contingent upon developing or reporting predetermined results.
● My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal.
● My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice.
● I have (or have not) made a personal inspection of the property that is the subject of this report. (If more than one person signs this certification, the certification must clearly specify which individuals did and which individuals did not make a personal inspection of the property.)
● No one provided significant real property appraisal assistance to the person signing this certification. (If there are exceptions, the name of each individual providing significant real property appraisal assistance must be stated.)
The above-cited certification is for the 2012-2013 period. The USPAP sometimes makes changes to this certification, so check with The Appraisal Foundation for the requirements that relate to the time period with which you are dealing.
Appraisals on an As-Completed Basis
Mortgage loans sometimes are granted based upon the value of the property on an “as-completed” basis. This might apply to a property that is completely new construction, properties that are being rehabilitated, properties that are being added onto, etc. In my experience of over forty years in and around real estate mortgage lending, it has been my experience that it is an industry standard practice that progress inspections on single-family residential construction and home improvement loans are always conducted by a real estate appraiser. Typical single-family construction and home improvements are relatively simple jobs well within the scope of a real estate appraiser.
Proximate Cause of Damages
Lenders pay for and rely upon the value opinions and appraisals provided to them by real estate appraisers. When an appraiser’s valuations are obviously so far off from what common sense would indicate, then it is more likely than not either the result of gross incompetence or dishonesty. In many cases, faulty appraisals are the proximate cause of the losses sustained by lenders as well as borrowers and investors.
The knee-jerk reaction for an attorney handling a real estate appraisal case often is to hire another real estate appraiser to serve as their expert witness. However, while this might or might not be an important aspect for some of the facts of the case, the bigger picture involves the overall performance of the loan and how the faulty appraisal and other factors lead to its failure; and these factors cannot be addressed by a real estate appraiser and must be addressed by an experienced lending professional that is of necessity also an expert in appraisals not only by training as a real estate lender but by having reviewed thousands of real estate appraisals over the years.
© 2012 by Don Coker.
ABOUT THE AUTHOR: Banking, Mortgage Banking and Lending Expert Witness Don Coker
Banking, Mortgage Banking and Lending Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.
Clients have included numerous individuals, 80 banks, and governmental clients such as the IRS, FDIC. Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, B ofA, Regions Financial, and a two-year term as a high-level governmental banking regulator.
B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School. Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media. Don Coker serves clients worldwide from his Atlanta metro area office.
Copyright Don Coker
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.