REQUIRED READING: It has been a turbulent two years in the mortgage markets. Fresh off the heels of one of the most severe crises in the mortgage industry's history, everyone is ready to put the past behind them and forge forward into recovery – and the last thing anyone wants to see is a repurchase request to cover losses from a flawed loan that was closed days, months or even years ago.
But that is exactly what could happen if Fannie Mae, Freddie Mac, a lender or an investor finds flaws within a loan. When a loan is considered to be flawed and is sent for repurchase, that loss gets passed along until it comes to the party that cannot disprove responsibility for the fault. That party ends up having to cover the loss. It could be the government-sponsored enterprise, bank, lender, correspondent or appraiser, but ultimately, that loss is coming out of someone's pocket.
Repurchasing a loan can cost a firm as much as hundreds of thousands of dollars per incident, so the company requesting the buyback will likely be highly motivated to place the responsibility on someone else. The company will be sure to work diligently to get those loans off its books and will often enlist the help of field experts who are experienced in evaluating loans and finding areas of neglect and noncompliance. By the time repurchase requests are issued, the loan is typically already delinquent and, therefore, already confirmed to be higher-risk.
Discrepancies in appraisals are often at the foundation of repurchase requests because appraisals, by nature, are subjective reports. It is important to remember that accusations about the quality of an appraisal are not statements of fact, and they may not even be accurate. If you are ever in the unfortunate position of receiving a buyback request, and if that request was based on an appraisal that was presumed to be faulty, your best defense is to disprove the claim – and the only way to do that effectively is to build a case that demonstrates the legitimacy of the original appraisal.
So how do you do that? First, remember that all appraisal-based repurchase requests follow the assumption that the requestor's review, information and discovery of a perceived flaw are more accurate than the appraisal in the file. Proving the accuracy of the original appraisal is the first important step in rebutting the allegation.
The Achilles' heel of the requestor's argument is that no one can be 100% sure of the accuracy of an appraisal that was completed on an earlier date without physical access to the property, and few, if any, companies disputing the original appraisal will ever see the physical structure in person. Assuming that is the case, the requestor is basing its decision on a comparison of the original valuation to a new appraisal, both of which are subjective in nature. This essentially means that the requestor's statements could very well be biased, subjective evaluations of the original appraisal. This is your opening for a counter argument.
Your best defense in fighting off the buyback is to provide a rebuttal based on documented facts – and those facts should demonstrate with specificity the accuracy of the original appraisal. You will need to prove beyond a reasonable doubt that the allegations in the buyback letter are not valid.
Preparing and presenting an argument of this caliber will take an investment of time and effort. As tempting as it may be, avoid the urge to just ‘whip something out’ as a fast and easy retort to the request. Even though you may want to get this process done as quickly and inexpensively as possible, it is not a good idea to skimp for the sake of saving time or money. Writing your own rebuttal letter or simply ordering a basic review appraisal could do more harm than good, and your efforts to save a few dollars just might end up costing hundreds of thousands of dollars.
With so much on the line, it is in your best interest to hire an appraisal professional who is experienced in repurchase requests and rebuttals to assist you in the step-by-step process it takes to make a strong case.
One of the most powerful tools for fighting a repurchase request is a retrospective field review and accompanying rebuttal letter. This is a lot different from your typical field review, because the valuation will not be associated with the funding of a loan. This is an important point. If you call an appraisal company and place an order for a review, you are likely to end up with a report that does little or no good for your case.
The best approach is to speak directly with the appraiser or the representative from the appraisal management company. Make sure your chosen professional has experience in handling repurchase requests, as well as in secondary market valuations and processes. Explain what you are looking for, what you aim to accomplish and the stakes that are on the table. Each case is different, so be sure to convey the specifics of what is needed during the review.
Your rebuttal should focus on the specific data, sales, contracts and any other information that was used in completing the original appraisal. If the appraiser provides a review in which he or she merely agrees with the value of the original appraisal without providing an explanation, you may as well submit a blank sheet of paper – that is how much weight unsubstantiated opinions carry. Your rebuttal needs to state the exact reasons why the reviewing appraiser agrees with the original value, specifically indicate what the original appraiser did right and explain the reasons why the comparables used were the best comps available. Ask the reviewing appraiser to provide supplemental comparables – ones that were not in the original report – that support the value of the original appraisal.
Also, look for holes in the requestor's appraisal review. When reviewing the repurchase request's supporting documents, look for inconsistencies or problems with the documentation provided. For example, did he or she use the same comparables as those used by the original appraiser? If so, how can the original appraisal be substandard? Remember, appraisals are very subjective, and the information presented is based more on opinion than on facts.
Another key point is to provide documentation that conclusively demonstrates your efforts to ensure the accuracy of the original appraisal. Providing proof of quality-control measures – both pre- and post-funding – carries enormous weight when building your case. If the original appraisal was subjected to a desk review, or if a second appraisal, reconciliation or automated valuation model was completed, make sure to include that information. This will strongly support your case.
A key in future transactions is to employ quality-control efforts at the time of origination or reasonably quickly thereafter. Timely measures carry more weight and credibility than those executed several years later.
Although the objectivity of appraisers is typically very good, it is natural to be affected by current market conditions and appraisal techniques when reviewing an appraisal that was performed several years ago. Any documentation that shows the steps you took to ensure accuracy at the time of the origination will strongly support your case.
Once you get all of the information you need, make sure to have an experienced appraisal company draft a letter supporting your position. That letter, which details the reconciliation, will be the single piece of information that ties everything in your case together. It must clearly state your position, provide supporting documentation and specifically explain the reasons why your original valuation is the most accurate.  Â
Brian Coester is CEO of Coester Appraisal Group, based in Rockville, Md. He can be reached at (888) 485-1999.
