The single biggest liability threat to both residential and commercial appraisers is the Federal Deposit Insurance Corporation. The FDIC held a conference last week in Chicago for law firms interested in representing the FDIC. What came out of that conference made me very anxious for appraisers, but it's much more than just a threat to individual appraisers. What the FDIC is doing hampers the ability of the appraisal profession to deliver accurate valuations going forward.

The reason is: if you're an appraiser doing work for a lender (which may or may not be one of the 700+ troubled banks on the FDIC's watch list), you know your risk of being sued by the FDIC for overvaluation in hindsight is eliminated by "coming in low" on the appraisal. That means more loans don't get made.

The FDIC has taken over more than 200 banks since the beginning of the mortgage crisis. When the FDIC takes over a failed bank, it usually sells off the banking assets to an existing lender but retains all of the potential legal claims against the failed lender's directors, officers, mortgage brokers, accountants, lawyers, appraisers, AMCs, etc. The FDIC is now in the business of suing these parties, blaming them for its failed banks' bad lending practices.

To show the wide scope of the claims that may be pursued by the FDIC, I have attached an excerpt from the FDIC's agreement to sell the assets of failed Downey Savings to U.S. Bank in 2008. In this agreement, which is very typical, the FDIC specifically retained the right to sue any person "whose action or inaction may be related to any loss . . . incurred by the Failed Bank." This means appraisers -- and many others -- to the FDIC.

At the conference for law firms interested in FDIC work, the FDIC made it very clear that pursuing professional liability claims is a major part of their intended course of action in the next two years. The FDIC is hiring hundreds of law firms do this work and plans to award contracts totaling more than $2 billion in 2010 for its various recovery efforts (not just professional liability). The FDIC's in-house lawyers stated that their efforts are going to resemble what the RTC did in the early 90's following the savings and loan crisis. Suing professionals and blaming them for failed banks' losses is such a significant part of the FDIC's plan that the division within the corporation has a special acronym: they refer to it as "PLG" for Professional Liability Group. At least from the conference, it was very clear that the FDIC has no conscience as to the impact that its "blame game" will have on the targeted individuals or, moreover, on the affected professions. If it makes individual appraisers feel any better, however, when it comes to appraisal issues, it is not just appraisers who have targets on their backs -- AMCs are on the radar screen too.

What can appraisers do? In my lawyer, non-appraiser opinion, it comes down again to appraisers supporting professional associations such as the Appraisal Institute and NAIFA to apply organized political pressure. It's not just "bad apple" appraisers who are being affected by the FDIC's actions -- good appraisers are being entangled too and, if unrestrained, the FDIC will have a negative impact on the profession as a whole.

Regulators and lawmakers need to understand why it's bad public policy for a quasi-government agency like the FDIC to be deputizing private law firms and launching unrestrained attacks on individual appraisers. Appraisers are professionals who render opinions of value -- they are not guarantors of collateral value or mortgage insurers for loans extended by the FDIC's failed banks at the peak of the bubble.

The threat of draconian, high volume litigation by the FDIC hampers the present ability of appraisers to give accurate valuations. In the current state of the real estate markets, the only way an appraiser can guarantee that he or she will avoid a later FDIC claim about over-valuation is to "come in low" on value.

Source: Appraisal Legal Defense and Insurance Blog by Peter Christensen and Robert Wiley - Legal issues and insurance matters affecting residential and commercial real estate appraisers