Balancing the Scales of Justice for Pro Se Homeowners

Does it matter if a fraudulent appraisal was used in my loan origination?

Posted by on Feb 2, 2012

Does it matter if a fraudulent appraisal was used in my loan origination?

On April 7, 2010, Patricia Lindsay, VP of New Century Mortgage, testified in front of the United States Congress Financial Crisis Inquiry Commission about the predatory lending practices of New Century Mortgage.  Ms. Lindsay testified that New Century did not retain the loans it originated and that in the quest to sell more and more loans, the  the definition of a good loan went from “one that pays” to “one that could be sold”.  

Among many of the failures Lindsay discusses is the pressure put upon appraisers to come in “at value” rather than determining the “actual value” of the property.  She tells about appraisers un-boarding houses to take pictures or omitting certain elements of the property by angling the camera to zoom in to make the property look the best possible and finding comparables to support the “at value” rather than “actual value” of the property.  New Century wasn’t alone in the use of fraudulent appraisals; it was common place with predatory lenders and some reports claim it was the “straw that broke the camel’s back” with WaMu.   As you may remember, WaMu and its appraisal firms were investigated by federal regulatory authorities for their prevalent use of fraudulent appraisals.  (Read here ;  part of this case was dismissed last November).

Typically one would expect fraudulent appraisals to be initiated from the purchaser – not the lender.  Why would a lender seek these appraisals?  The lenders never had to suffer the consequences of their high risk loans because it was passed on to the Wall Street firms who were securitizing them into REMICs and then hawking them to unsuspecting investors.  Countrywide’s CEO, Angelo Mozilo  who once called Countrywide’s portfolio of loans “toxic”, gleefully sold his toxic loans to the hungry Wall Street firms;  John Stumpf, CEO of Wells Fargo, told the San Francisco Gate (Sept. 2007.d)  the exotic loan products (ARMs) were never intended to be “long term” mortgages on the properties; obviously Wells Fargo planned on capturing refinancing fees as the ARM’s started escalating.  If they couldn’t recapture the refinancing fees, they could pass off the bad loan to REMIC investors for a fee.  Win win for Wells Fargo, who by the way, estimates put at being the 7th to 9th largest subprime lender.  (See Truth About Wells Fargo)

So does it matter if you are in the middle of a foreclosure and you learn that the appraisal was fraudulent?  The reality is the state (at least in California) and federal remedies for fraudulent appraisals are virtually non-existent.  However, for homeowners in Alabama, New Hampshire, Texas, Washington, and Arizona there are cases where the homeowner was able to sue the appraiser (See Sage v. Blagg Appraisal Co. Ltd.,  209P. 3d 169, (Az. Court of Appeals, 1st Div.)  Sage discusses the responsibility of the appraiser to the buyer and notes the listed states as states that have recognized the appraiser’s responsibility to the buyer.

There are also cases in which the homeowner was able to successfully sue the lender on a negligent appraisal when the lender knew the borrower was relying on the banks appraisal.  (See Larsen v. United Fed. Sav. & Loan Ass’n (Iowa 1981) 300 N.W.2d 281 [21 A.L.R.4th 855] ; See Costa v. Neimon (1985) 123 Wis.2d 410 [366 N.W.2d 896].)

In Nymark v. Heart Fed. Savings & Loan Assn., 231 Cal. App. 3d 1089 – Cal: Court of Appeal, 3rd Appellate Dist. 1991 the California Court of Appeals (3rd District) found, “In California, the test for determining whether a financial institution owes a duty of care to a borrower-client “`involves the balancing of various factors, among which are [1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant’s conduct and the injury suffered, [5] the moral blame attached to the defendant’s conduct, and [6] the policy of preventing future harm.'” (Connor v. Great Western Sav. & Loan Assn. (1968) 69 Cal.2d 850, 865 [73 Cal. Rptr. 369, 447 P.2d 609, 39 A.L.R.3d 224], quoting Biakanja v. Irving (1958) 49 Cal.2d 647, 650 [320 P.2d 16]; Fox & Carskadon Financial Corp. v. San Francisco Fed. Sav. & Loan Assn., supra, 52 Cal. App.3d at pp. 488-489; cf. Gay v. Broder, supra, 109 Cal. App.3d at pp. 73-74.)  (Note – Plaintiff is the homeowner and Defendant is the lender).  These cases, as you can see, all were before the “great mortgage crisis” and evidence of the lenders use (and encouragement) of fraudulent appraisals came into the public’s awareness.

Some of the causes of action, which other homeowners are successfully using in pursing fraudulent appraisals, are [nonmember] Sorry the rest of the Content is for PAID subscribers.  Why not join today and learn about the cases homeowners can consider in seeking restitution for the fraudulent appraisals!.    [/nonmember] [private Monthly|annual|advocate] Fraudulent Omissions, Negligence, Misrepresentation, violation of Business & Professional Codes § 17200, etc., Breach of the Covenant of Good Faith and Fair Dealings.  Here are a few of cases where homeowners may want to consider in building their arguments.

First, many states follow the Restatement (Second) of Torts § 552 (Read here for full Restatement) , which allows a claim for negligent misrepresentation against “[o]ne who, in the course of his business . . . supplies false information for the guidance of others in their business transactions.”  In relevant part, Restatement § 552 provides:

(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

(2) . . . the liability stated in Subsection (1) is limited to loss suffered

(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and

(b) Through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.

In 1992 the California Supreme Court, in Bily v. Arthur Young & Co., the Court determined that a provider of professional services could be liable to third persons who may receive and rely on the information in the professionals report.

In 1992, the California Court of Appeals, in Soderberg v. McKinney, held appraisers liable to 3rd party investors who suffered damage due to an inaccurate appraisal.   In this matter the investors sued for fraud, negligent misrepresentation, concealment and breach of contract.  The court found liability may be appropriate where the Appraiser “knows with substantial certainty that plaintiff, or the particular class of person to which plaintiff belongs, will rely on the representation in the course of the transaction.”  (Plaintiff was the investors).

The Soderberg decision was then followed up by the another California Court of Appeals in Sorosky v. Hamill  (which is no longer a published opinion).

All three of these cases concern 3rd parties.  A homeowner who relies on the appraisal being done by the lender through either an in house appraisal or an appraiser hired by the lender, is a 3rd party.

In Larsen the homeowners were able to successfully show an “agency relationship”.  Other areas of consideration, though not used in Larsen, could have been a “breach of contract”.  In a breach of contract, obviously the homeowner had entered into an agreement with the lender for the financing of the loan and thereby relied on the lender to perform its duties with reasonable care and skill.  The lender would, one would assume, be responsible for negligent performance in the appraisal process.  The hurdle here is that the borrower is not a party to the contract between the appraiser and the lender; so the borrower would have to convince the court that while not a party to the contract, the borrower was a 3rd party to the contract.  (This is where Bily, Soderberg and Sorosky may be helpful).

Barring be able to prove the breach of contract, a person might also consider negligence in tort whereas the lender had a duty to conform to a standard reasonable care in ensuring the appraiser was performing the appraisal properly.  Reading Lindsay’s testimony, you can easily see New Century abandon all “care” in the pursuit of more signatures on loans. When the lender knows that the information is going to be used by the borrower liability for damages is extended to that borrower.  If New Century did not want responsibility for the borrower’s reliance on the appraisal, they could have told the borrower to get their own appraisal.  If you as a borrower did not get your own appraisal and instead relied on the lender, then this is an area worth exploration and consideration.

Some other cases  you may want to read in your exploration of holding the lender responsible for the fraudulent appraisal, depending on which state and Court you are in,  are:

 Kelley v. Carbone (2005) 361 Ill.App. 3d 477

West v. Inter-Financial Inc., 2006 UT App. 222

Stotlar v. Hester (1978) 92 N.M. 26 [582 P.2d 403], cert. den. 92 N.M. 180 [585 P.2d 324]

Chemical Bank v. National Union Fire Ins. (1980) 74 A.D.2d 786 [425 N.Y.S.2d 818], app. dism. 53 N.Y.2d 864 [440 N.Y.S.2d 187, 422 N.E.2d 832]

Perpetual Fed. S. & L. v. Porter & Peck (1992) 80 Ohio.App. 3d 569 [609 N.E.2d 1324]

Anthony Costa and Sandra Costa v. Robert Neimon (1985) 123 Wis.2d 410, 366 N.W. 2d 896.

(For an exhaustive list of cases around the country, see 44 ALR6th 1, Liability to Third Party for Negligent or Fraudulent Appraisal of Value of Real Property, by Kurtis A. Kemper, J.D.)

While it is not a common cause of action, given the current mortgage crisis and wealth of knowledge that lenders were predisposed to use fraudulent appraisals, this is an area of consideration as ONE of the causes of actions a homeowner may use. [/private]





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