In November, Appraiser Law Blog reported about “rotten reviews” being used by mortgage insurance companies to deny mortgage insurance claims by lenders. The reason I wrote about the issue was that in some cases, mortgage insurers’ and other parties’ usage of rotten review appraisals is leading to unjustified claims against individual appraisers. It’s a nightmare — emotionally and professionally — for an appraiser to become embroiled in such a lawsuit, a nightmare made worse because it results from large companies treating appraisers as pawns.

As a refresher, the practice being employed by some mortgage insurers is to obtain review appraisals in connection with claims by lenders for their losses on foreclosed loans that have mortgage insurance in place. The review appraisals are obtained for the purpose of finding grounds on which to claim that the appraisal violated USPAP or appraisal guidelines of Fannie Mae or Freddie Mac. The mortgage insurers then use a negative review to deny the lender’s insurance claim on the basis that the lender misrepresented the loan to the mortgage insurer and/or otherwise did not comply with the master policy issued by the mortgage insurer. We’re talking about minor disagreements in value between a full original appraisal and a retroactive desktop review being used to deny a mortgage claim. We’ve seen differences of as little as 12% being asserted by a mortgage insurer to rescind a policy.

I suspect that many of the reviews are being performed by out-of-state reviewers or by reviewers with less experience than the original appraiser. I also suspect that some of the companies providing the reviews know the mortgage insurers’ desired agenda and that the reviews suffer from that bias, as well as the bias of post-mortgage crisis hindsight.

According to the mortgage insurers’ own corporate reports, they are denying 20-30% of the claims they receive. However, I think that this percentage may, in fact, be understating the number of claims they deny to private lenders. The reason for this suspicion is that MGIC, in particular, has sold a majority of its insurance to cover loans sold to Fannie Mae — I think there’s a strong likelihood that paying those claims may be favored over others. Indeed, in MGIC’s most recent 10-Q SEC filing, it disclosed the possible jeopardy that the company would face if Fannie Mae decided to revoke MGIC’s designation as an eligible mortgage insurer which is already on shaky ground (sounds a bit like being “blacklisted” as an appraiser but on a bigger scale). The mortgage insurers attempt to explain their new claims denial tactic in their SEC filings by essentially stating that they just discovered mortgage underwriting was sloppy during the peak of the mortgage boom — if we are to believe them, these mortgage industry experts were the last to realize this fact.

Well, it’s not just the affected appraisers who are unhappy now. On December 17, Bank of America’s mortgage lending and servicing subsidiaries Countrywide Home Loans and BAC Home Loans Servicing filed a lawsuit against Mortgage Guaranty Insurance Company (MGIC), one of the biggest U.S. mortgage insurers. Filed in San Francisco Superior Court, BAC’s complaint alleges, among other things, that MGIC is using rotten review appraisals to deny Countrywide’s and BAC’s mortgage insurance claims. The lawsuit is a big enough problem for MGIC that it felt required to disclose the lawsuit as a material corporate event in a recent 8-K SEC filing, causing its stock price to plummet 10%. Some of the relevant allegations in the lawsuit are contained in the page displayed to the right. Bank of America’s subsidiaries allege point blank “the review appraisals lack credibility or violate the Uniform Standards of Appraisal Practice (‘USPAP’).”

There’s a strong chance that the suit may not go anywhere other than straight to arbitration because most insurance policies of this type contain mandatory arbitration clauses to avoid public litigation. Nevertheless, the lawsuit is good news for individual appraisers who don’t do review work for mortgage insurers because just the filing of a lawsuit like this further exposes the unfair practice and helps put a stop to it. It’s bad news, of course, for the few appraisers who perform this review work — they stand a good chance of being dragged into depositions or state disciplinary proceedings. Aside from that, one does wonder why any lender would ever again pay for mortgage insurance from one of these companies?

If this issue has affected you as an appraiser or as a lender, please contact me to discuss it confidentially.

Peter Christensen

I am an attorney and principal of the Christensen Law Firm. The matters that I handle and the clients whom I serve are focused on valuation services. My work ranges from the regulatory and structural details of providing valuation services to professional liability and disciplinary issues.