Instructors: Tom Munizzo , IFA Tim McCarthy, IFA

1. Dealing with a Negative Review Instructors: Tom Munizzo, IFA Tim McCarthy, IFA

2. Who are those guys??? Tom Munizzo, IFA tmunizzo@irr-residential.com T J McCarthy, IFA tj@tjmccarthy.com

3. Definitions • Appraisal Review: The act or process of developing and communicating an opinion about the quality of another appraiser’s work that was performed as part of an appraisal, appraisal review, or appraisal consulting assignment. (2012 USPAP). • Appraisal review is the practice of appraisal.

4. Definitions • FDIC STATES THAT REVIEWING APPRAISALS is: A review of valuation information is an essential component of sound credit administration and is mandated by the Dodd Frank Act. Reviewing appraisals before engaging in a loan transaction ensures the value conclusion is reliable and enables the financial institutions to make informed credit decisions, manage credit risk and meet supervisory requirements.

5. Administrative Review vs. Appraisal Review • It is critical to understand that there are two types of Appraisal Reviews; • Administrative review which is a review for completeness. This is reading the appraisal to make sure that all the required elements are there such as the photographs, sketch, maps, certifications and signatures. Was the report that was submitted complete? • S.R 3 Appraisal review which is about the quality of the report; the adequacy of the information and a statement on the value. Essentially what you have above is an appraisal of real estate and the other is an appraisal of an appraisal. There is NOdifference between an appraisal and an appraisal review when it comes to the quality, condition and opinion of value.

6. Definitions • Desk Review: An appraisal review in which the reviewer’s scope of work does not include an inspection of the subject property. (Dict. Of Real Estate Appraisal, 5th Ed.)

7. Definitions • Field Review: An appraisal review for which the scope of work includes inspection of the exterior and sometimes the interior of the subject property and possibly inspection of the comparable properties to conform the data provided in the report. (Dict. Of Real Estate Appraisal, 5th Ed.)

8. Definitions • Quality Control Review: Common form of review being performed by AMC’s. In most cases it is a administrative review focusing on errors, omissions and compliance issues, but does not include comments on or reference to development issues, approaches to value, reconciliation and value conclusions.

9. Definitions • Quality Assurance Review: Common form of review being performed by Banks and many of the large Lenders. In most cases it is a technical review focusing on the quality of the appraisal, the adequacy of the information and focuses on the development issues, approaches to value, reconciliation and value conclusions.

10. Definitions • Forensic Review: A Forensic Review is an intensive real property appraisal review. It has a scope of work and definition of review problem that focus on investigation, verification. The scope of the review work will vary by jurisdictional rules, client conditions and/or property type. Some litigation reviews may be forensic. (American Society of Appraisers)

11. Definitions • A forensic review requires data resources to validate or invalidate data back in time=retrospective • Researching and interviewing to confirm (forensic) • Physically inspecting in person when possible • Purpose – To evaluate the credibility of the appraisal report in order to determine: • Fraudulent actions • Misrepresentation for loan eligibility • Compliance to applicable state, federal guidelines • Developed in accordance to USPAP under Title XI

12. State Licensing Requirements • Do I have to hold a license in the state where the subject property is located when performing a review? • MAYBE. Always check with the Appraisal Statutes and Rules for a specific state.

13. State Licensing Requirements 13 Jurisdictions do not require a license to review appraisals if the reviewer is not located in the jurisdiction where the licensing obligation arises. California, Delaware, Hawaii, Massachusetts, Michigan, Mississippi, New Mexico, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania 

14. State Licensing Requirements 9 states require a reviewer to be licensed in the state regardless whether the reviewer provides an opinion of value or not. Automated reviews are not applicable to this. Alaska, Arizona, Florida, Georgia, Maine, Minnesota, Nevada, Rhode Island and Utah, Texas

15. State Licensing Requirements 28 state licensing requirements are triggered  by providing an opinion of value Alabama, Arkansas, Colorado, Connecticut, District of Columbia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Missouri, Montana, Nebraska,  New Hampshire North Dakota, Oregon, South Carolina, South Dakota, Tennessee, Texas, Vermont, West Virginia, Washington, Wisconsin, Wyoming

16. Questions you need to ask yourself Who reviewed your appraisal report? - The client, an AMC, the State licensing agency, FHA, GSE’s, FDIC, etc. Why was my appraisal reviewed? - Lenders regulatory requirements, loan defaulted, complaint filed with the State licensing agency, etc. Did you receive a copy of the review? - Simple yes or no. Sometimes appraisers just receive a letter citing the deficiencies found in the report and ask for a response. Very common with the GSE’s.

17. Questions you need to ask yourself Are you being asked to comment on the review? Is the entity asking you to comment your client or a stated intended user in your report? - If not you could be in violation of USPAP’s Ethics Rule under Confidentiality.

18. USPAP Ethics Rule; Confidentiality An appraiser must protect the confidential nature of the appraiser-client relationship. An appraiser must act in good faith with regard to the legitimate interests of the client in the use of confidential information and in the communication of assignment results.

19. USPAP Ethics Rule; Confidentiality An appraiser must not disclose: (1) confidential information; or (2) assignment results to anyoneother than: the client; persons specifically authorized by the client; state appraiser regulatory agencies; third parties as may be authorized by due process of law; or a duly authorized professional peer review committee except when such disclosure to a committee would violate applicable law or regulation.

20. Questions you need to ask yourself How should I respond? – By phone, email, letter, in the original appraisal report, or not at all. If the review provided a different value conclusion, can I comment on that value in my response without performing a Standard 3 Review. - Yes. You have already performed an appraisal on the property as of an effective date, therefore your report in itself supports why you don’t agree with the reviewers opinion of value.

21. Questions you need to ask yourself What if I completed the appraisal over 5 years ago? USPAP Record Keeping Rule NOTE: USPAP states that an appraiser must retain the workfile for a period of at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony relatedto the assignment, whichever period expires last.

22. Questions you need to ask yourself Do I need an attorney? Should I contact my E & O carrier?

23. Preparing to rebut a negative review! What will I need? - A copy of the review report - A copy of your original appraisal report - Access to public records, MLS, etc. - Your workfile - Strong writing skills

24. Common errors made by a reviewer Does the review comply with USPAP? - Before you respond to a negative review you should familiarize yourself with Standard 3; Appraisal Review, Development and Reporting and Advisory Opinion 20; An appraisal review that includes the Reviewer’s own Opinion of Value. There are also several FAQ’s on this topic in USPAP.

25. Appraisal Reviews and USPAP Standard 3 states that a review appraiser “must not render appraisal review services in a careless or negligent manner, such as making a series of errors that, although individually might not significantly affect the results of an appraisal review,in the aggregate affects the credibility of those results.” Whenever possible, quote actual language from USPAP in your response to better support your position over that of the reviewer’s.

26. Appraisal Reviews and USPAP Has the reviewer… …identified the client and other intended users? …identified the intended use? …identified the purpose of the review, including whether the assignment includes the development of the reviewer’s own opinion of value? …determined the scope of work necessary to produce credible assignment results?

27. Appraisal Reviews and USPAP Consistent with the reviewer’s scope of work, the reviewer is required to develop an opinion as to the completeness, accuracy, adequacy, relevance, and reasonableness of the analysis in the work under review, given law, regulations, or intended user requirements applicable to the work under review. It is here that most reviewers make errors because of their lack of knowledge as it pertains to industry guidelines, requirements, assignment conditions and law. Did this reviewer even have the skill set to complete the review?

28. USPAP Appraisal Review FAQ’s The following are the FAQ’s that USPAP offers pertaining to the general topic of discussion in this seminar…dealing with a negative review. There are numerous other FAQ’s that give direction more to the appraiser performing the review as opposed to the appraiser whose work is the subject of the review.

29. USPAP Appraisal Review FAQ’s

30. USPAP Appraisal Review FAQ’s

31. USPAP Appraisal Review FAQ’s

32. USPAP Appraisal Review FAQ’s

33. USPAP Appraisal Review FAQ’s

34. Fannie/Freddie Field Review Forms Fannie and Freddie have developed two Field review forms. The One Unit Residential Appraisal Field Review Report and the 2-4 Unit Residential Appraisal Review Report. Both forms have imbedded language to cover Intended Use, Intended Users, Purpose, Scope of Work, Limiting Conditions and Certifications. But most reviewers never read or follow the Guidance Notes. You should familiarize yourself with these notes and refer directly to them if you determine that the reviewer has not complied with the recommended guidance.

35. Guidance Notes

36. Guidance Notes

37. Reviewing the reviewer Common errors Unfortunately, many reviewers believe they have to discredit your appraisal and therefore they are not performing an objective review of your work. It’s common for them to use secondary data sources to suggest your data is incorrect. A common example is using the GLA provided by the local assessor for the subject property when you actually measured the building. That’s an easy one to rebut. Before you read the review you should re-familiarize yourself with your original report. Next read the review completely through and make notes of any obvious errors and omissions.

38. Reviewing the reviewer Common errors Verify any discrepancies the reviewer cites in your assignment. Don’t assume their data is correct. This includes items such as zoning, flood zones, property characteristics, MLS data, neighborhood boundaries, school district boundaries. Does the negative review provide sufficient supporting data for its conclusions or was it subjective in nature…lacking substance!

39. What if the reviewer is correct??? Maybe the review isn’t negative and you did make errors in your report, or there were better comparables that you missed. If that is the case, you must acknowledge the deficiencies and if necessary make corrections to you original report. Send the report to the client identifying any revisions (which is a better sounding word then corrections). This way you are approaching the review as a positive process. As appraisers we get paid to provide our opinion. The process is very subjective in nature and try as hard as we may to be perfect, we will all make unintentional errors or omission from time to time. So, never respond in a hostile tone whether your right or wrong, always be professional. We find that the best responses are short and concise to each of the key points or issues presented.

40. Freddie Mac Repurchase Demand Sample The following is an actual letter sent to a lender from Freddie Mac regarding an appraisal that was performed almost five years ago. Freddie Mac has since taken back the property as an REO and states in their letter to the lender that the original appraisal was unacceptable because it didn’t meet their requirements. No actual review was performed by an appraiser…only by an employee at Freddie Mac.

42. Appraiser’s letter of response We strongly disagree with the comments in the letter from Freddie Mac stating that the estimated market value for the subject was not properly supported by the comparable sales provided. It does not appear that Freddie Mac utilized the services of a licensed Illinois appraiser to perform a review of the subject property. Further, they did not provide any additional market data, including additional sales data to support their claims or conclusions. Instead, their letter references variances between the subject and the comparables, which would suggest that since the comparables are different and not identical to the subject then the opinion of value is not supported.

43. Appraiser’s letter of response As a practicing appraiser with over 35 years of experience I am greatly concerned that Freddie Mac would base their conclusions on the very reason lenders utilize appraisers; to recognize variances between the subject property and market data and adjust for these variances. I understand the market is currently flooded with foreclosures as a result of the housing crisis, but blaming the appraiser and the appraisal for a borrower’s inability to pay their mortgage is unwarranted and in the case of the subject property unfounded. The letter from Freddie Mac would suggest that proper support isn’t present because the appraiser does not provide enough comments, but this is a summary appraisal report, not a self-contained assignment.

44. Appraiser’s letter of response We have broken down the comments in the letter from Freddie Mac as follows: - The subject property is a single-family dwelling located in an urban market, which is more than 75% built up. - The appraisal report states that the market is over 75% built up in the neighborhood section on page 1.

45. Appraiser’s letter of response - The subject property was 15 years old as of the effective date of the appraisal, with three bedrooms, one bath and no garage (or onsite parking of any kind). All three sales were substantially newer than the subject property. All had two bedrooms and two baths, and all had two-car garages. Basement finish for all three sales is superior. These sales are not representative of the subject property.

46. Appraiser’s letter of response - We strongly disagree that the sales selected for this report are not representative of the subject. It is our experience that a buyer in this market would agree that these are similar and competing raised ranch style properties if the subject and the sales were listed at the same time. The subject property is a 15 year old Raised Ranch. All 3 sales included in the report were similar style homes located within .55 mile of the subject. Since there were no recent sales that identically mirrored the subject in the area, the appraiser utilized sales available in the closed sales inventory and adjusted for all variances. What the reviewer does not realize is that these sales do have a third bedroom in the basement.

47. Appraiser’s letter of response Knowing this additional information would disqualify the statement that the basement finish of the sales is superior and the bedroom count of the comparables are different. It is a function of the form to separate above and below grade room adjustments. This is not an error on the appraiser’s part but a function of the form. In other words, the subject and the comparables offer similar utilities and functionality in bedroom count. Actually, the subject and comparables main residence are almost identical with the exception of 1 additional bathroom. Using slightly younger aged homes due to a lack of similar aged residences would be a more acceptable alternative then using sales of homes that were closer to the predominant age in the area, which was 70 years old. Although onsite parking is not present for the subject, there is access to the site via the rear alley and room on the site to construct some form of onsite parking in the future, including a 2 car garage.

48. Appraiser’s letter of response - The predominant value in the subject neighborhood as of the effective date of the appraisal was $234,000. The estimated market value for the subject was $305,000.00. The appraisal does not provide sufficient justification for a property valued substantially above the predominant value in the subject neighborhood, yet substantially inferior to all the comparables sales provided.

49. Appraiser’s letter of response - The subject’s final opinion of value is above the stated one-unit housing predominant value; however it does fall within the indicated value range reported in the neighborhood section. The reviewer states that the opinion of value is substantially above the predominant value. This is not correct when you take the full range of marketable values into consideration. The final opinion of value is actually substantially below the High end of the indicated value which was $535,000.00. This places the final opinion of value well within the center of the housing price range for this market. At the time of this appraisal Freddie Mac only required the appraiser to comment if the final opinion of value falls outside of the reported one unit housing price range.

50. Appraiser’s letter of response There is no impact on the subject’s marketability because it did not appraise for the predominant value. The predominant value is simply a measure of central tendency, i.e. mean, median and/or mode. It is not intended to suggest every home in a specific market area should contract at this centralized value determination. The subject is not considered to be an over-improvement for the market area. We also disagree that the comparables are substantially superior to the subject. They are superior in some areas, but also inferior in others. Adjustments were made to reflect all of these variances and none were excessive.