Fallout from Home Mortgage Crisis: Lender Claims Property Appraisers Are Liable for Lost Collateral Value
A unit of Wilmington Savings Fund Society, FSB, acting as the trustee of a mortgage loan trust (“Trustee”), has rung in the New Year by filing nine lawsuits against appraisers whose appraisals were the basis for mortgage loans. See, e.g., Christina Trust, a Div. of Wilmington Savings Fund Soc. FSB v. Kasper, et al., Case No. 2:17-cv-00129 (D.N.J., filed Jan. 6, 2017). In each of those lawsuits, filed in the federal court for the District of New Jersey, the Trustee alleges that the 2007 and 2008 appraisals did not comply with the Uniform Standards of Professional Appraisal Practice (“USPAP”) and, as a result, provided a significantly inflated value of the property that misrepresented the collateral for the loan. The complaints assert that, but for the inflated appraisals, the lender would not have made the loans, and when the properties were foreclosed upon and later sold, the proceeds were not sufficient to cover the outstanding mortgage balances. The suits seek compensatory damages, plus punitive damages, attorney’s fees and interest and costs.
The negligent and grossly negligent acts alleged in the complaints include failing to use appropriate comparable properties, using unsupported adjustments to value or failing to incorporate appropriate adjustments, incomplete research and relying on inaccurate property descriptions. The appraisers are also alleged to have made negligent misrepresentations in the appraisal reports about the value of the property and the procedures used to derive value. Although the complaints do not assert fraud, they allege that the violations of professional standards are such that the “appraiser was most likely intentionally and knowingly trying to support an inflated value.”
Other cases have been brought against appraisers by the FDIC and other lenders or trustees who have suffered similar damages. Although many of them have survived motions to dismiss, the far more interesting issues pertain to damages, which likely could only be established or rebutted by expert evidence. Assuming a violation of professional standards could be established through an expert appraiser, the plaintiff would need to show that the breach of the appraisal standards was the proximate cause of the damage.
But the loss of collateral value could have been caused by other things, including macroeconomic conditions (the deep recession and the home mortgage crisis), which caused home values in many locations to decline during 2007 and 2008. If the entire neighborhood deteriorated over the next year or two because many other homeowners defaulted on their mortgages, then only a very sophisticated economic analysis could isolate the damage caused by the alleged inflated appraisal. The Trustee would also need to account for the passage of time between the appraisal and the eventual foreclosure, which may have included the time it took the trustee to trace the assignment of the collateral through a chain of successive owners.
The defendant appraisers will also likely dispute whether the actions of the Trustee to mitigate its damages were commercially reasonable. The complaints do not reveal whether the Trustee tried to recover the deficiency from the borrowers or, if it did not, why not. The defendants would also seek to blame the Trustee for some portion of the loss. The parties may need expert testimony to show that the Trustee’s conduct comported (or was inconsistent) with collateral protection practices. Still another issue would be the extent to which the condition of the property changed over time; a borrower whose home was “underwater” would have little incentive to maintain it. The complaints provide no details on the timing of the foreclosure or the condition of the properties at that time.
At this early point, it is not clear whether these lawsuits will ever progress to the point where the court rules on any of these causation and proof issues. However, it is clear that the effects of the great recession and the home mortgage crisis continue to be felt almost a decade later.