New Fannie Mae / Freddie Mac URAR Form - Ambiguities and Liabilities

On March 24, 2005 Fannie Mae released final modifications to eleven report forms in their Announcement 05-02. Their primary objectives with the modifications were to communicate their expectations for the property valuation and appraisal reporting process, clarify the appraiser's accountability for the quality of his or her appraisal and help ensure the appraiser's compliance with both Fannie Mae and USPAP requirements. Fannie Mae requires all appraisals performed on and after November 1, 2005 to be on these final report forms.

Freddie Mac's Industry Letter dated March 31, 2005 released nine forms; the changes are identical to the Fannie Mae modifications. Freddie Mac believes these changes will streamline and enhance the appraisal process. These forms are mandatory for all appraisal reports that have effective dates on or after January 1, 2006.

Our National Claims counsel reviewed the new forms and highlighted a few issues for appraisers to consider. The new forms attempt to address improper "flipping" by adding many new requirements regarding prior sales, listings and comparables, etc. These changes are positive from a liability perspective because it requires appraisers to do more effective analysis and not just simply state the facts without providing reasons and explanations. Another positive revision is that they removed "the borrower" out of the definition of "Intended User".

However, concerns remain over other aspects of the forms, in particular over various Appraiser Certification statements. These include #23 of the Appraiser's Certification, which says that the borrower "may" rely on the appraisal. In the legal sense "may" is ambiguous; "may" could denote permission or a possibility to rely on the appraisal. Since the majority of our claims are from borrowers alleging some undisclosed defect or condition, a borrower's counsel may attempt to use this new language to argue that the appraiser had a duty to the borrower since the borrower "may" rely on the report.

It is therefore even more important than before that appraisers insert language into EVERY appraisal about the report not being a home inspection, that only a visual inspection of accessible areas was done and that the appraisal cannot be relied upon to disclose conditions and/or defects in the property. Additional language may also explain that simply because a borrower or third party may receive a copy of the appraisal, does not mean that the borrower or third party is an Intended User as that term is defined in the forms.

Even if the borrower "may" rely on the appraisal report, they should not be relying on it to disclose condition and defects. That is the job of the home inspector. Inserting this additional language can also help in lender claims, where it is alleged that the appraiser failed to disclose termites and other conditions that made the home sell for less after foreclosure.

Also of concern is language in #21 and #23 of the Appraiser's Certification about another lender, other than the appraiser's lender/client, getting the report. Certification #21 says the lender/client may give the appraisal to another lender, at the request of the borrower, without even having to get the appraiser`s consent. Certification #23 says this other lender "may" rely on the appraisal report. Does that mean that this new lender can also sue the appraiser? Does the appraiser owe a duty to this lender?

In summary, we are of the opinion that the appraiser needs to be concerned about increased liability to third parties, such as the borrower and other lenders of whom they may have no knowledge. Just because the forms say these parties may receive copies of the reports and may rely on them, we will still argue that the appraiser owes a duty only to the lender/client and that the appraisal can only be relied upon to the extent that reliance is reasonable.

We hope to be able to clarify all of the unresolved issues that we raised in this article in the future; only time will tell how the industry and courts will interpret the new language. Fannie Mae/Freddie Mac and the Appraisal Institute have various courses scheduled to educate all users of the forms. Our Claims Counsel is scheduled to attend some of these courses and we will report back as soon as we can shed more light.

Many appraisers are drafting language that they intend to include in their future reports in an effort to "clarify" certain Limiting Conditions and Certifications. We must caution that the new forms specifically state that, "Modifications or deletions to the certifications" are not permitted. However, the appraiser may "expand the scope of work to include any additional research or analysis necessary based on the complexity of this appraisal assignment". Also, USPAP requires that an appraiser supplement an appraisal report if the required form does not adequately cover all USPAP requirements.

Suggested Additional Language to Clarify Intended User (per Fannie Mae`s Update, November 2005):

"The Intended User of this appraisal report is XXX (Name of your Lender/Client). The Intended Use is to evaluate the property that is the subject of this appraisal for a mortgage finance transaction, subject to the stated Scope of Work, purpose of the appraisal, reporting requirements of this appraisal report form, and Definition of Market Value. No additional Intended Users are identified by the appraiser."

Suggested Additional Language to Clarify Scope of Work:

"The appraiser is not a home inspector and this appraisal report is not a home inspection, the appraiser only performed a visual observation of accessible areas and the appraisal report cannot be relied upon to disclose conditions and/or defects in the property."

It has also come to our attention that there is a rumor circulating that the new forms will negate real estate appraisers' E&O coverage. We see nothing in the new guidelines that would negate or adversely effect coverage that is available under our ALIT Program E&O policy (subject to all policy terms and conditions).

Copyright 2005. Liability Insurance Administrators. All rights reserved.