Will lenders succeed in suing appraisers for “inflated appraisals” created back when everything was inflated, when everyone knew it, and at least some lenders were obviously complicit in the inflated appraisals (or, at a minimum, were indifferent and reckless as to the widespread practice)? Maybe some lenders will be able to recover some of their losses from those bubbly days?
Before the residential mortgage meltdown, which culminated in 2006-2008, that is, in 2002-2005, there was quite a market bubble as we now know. In that upside-down world, it seemed some lenders would lend almost any amount of money to almost any borrower foolish enough to say yes. Risk of default, the logic seemed to go, would be “someone else’s problem” (the rest of us, as it turned out).
In those delirious times when money was gushing into real estate (“your profits are virtually limitless,” Bill Bronchick said in a December 2006 article (“Flipping Works in Any Market”) about real estate investment), some lenders would lend money to borrowers based on appraisals that grossly over-estimated the value of the properties that supposedly secured the mortgages. Someone with a home worth $280,000 would get property appraised for $440,000 and, on that basis, take out a $350,000 loan. Again, risk of an under-secured loan, the logic went, would be “someone else’s problem.” (There was also a rationalization that “home values always go up.”)
In fact, some lenders were complicit with appraisers, instructing (expressly or implicitly) that appraisers to “back into” appraisal amounts needed to “do the deals.” So, if a borrower wanted $350,000, the lender would suggest to the appraiser a valuation of $437,500 so they could do the loan at $350,00 (80% “loan to value”).
This raises interesting questions about lawsuits by lenders against appraiser for “inflated appraisals.” The appraisers are in a jam because they can hardly defend by saying, “We falsified the appraisals because you encouraged us to….” The lenders, however, may be challenged because appraisals are, by definition, estimates with inherent uncertainty. Also, they are vulnerable to claims of 20/20 hindsight bias. (“Yeah, sure, now that the bubble’s burst, our appraisal seems high….”)
The denial of defendant appraiser’s motion to dismiss by U.S. District Court Judge John R. Tunheim (D. Minn.) in TCF National Bank v. Market Intelligence, Inc. is worthy of note for several reasons.
First, in the face of a serious statute of limitations problem, Judge Tunheim held that Defendant’s assurances that a single allegedly inflated appraisal was a “one-off” rather than a systemic problem could serve as “fraudulent concealment” sufficient to toll the statute of limitation.
Judge Tunheim also held that “By alleging that Market intentionally induced TCF to rely on false assurances, TCF’s adequately alleged that it exercised due diligence,” which seems like a logical leap. In fact, it would appear to remove any actual obligation to exercise any diligence of any kind. (Judge Tunheim also held, alternatively, that TCF did not have to plead due diligence anyhow.)
Finally, many private businesses and individuals have tried and failed to leverage the Minnesota Consumer Fraud Act via the Private Attorney General statute against civil defendants. They have failed due to the substantial barrier of Ly v. Nystrom requiring that the litigation must provide a “public benefit.” Nevertheless, Judge Tunheim held:
Because of the extensive impact that Market’s alleged actions may have had on the public, the Court finds that TCF has alleged a public benefit.
So if a real-life “consumer” tries to invoke Minnesota’s Consumer Fraud Act (“MCFA”) to fight the alleged fraud of a crooked vendor who defrauded her, she will lose because she cannot show a “public benefit.” A bank, however, suing its appraiser for thousands of inflated property valuations, because of the magnitude of the claimed losses, will have recourse to the MCFA.
Why does it seem that relief under the MCFA is made available for powerful institutions where it is denied individuals? Maybe the apparent imbalance is just a matter of triage for an overburdened judicial system. That makes sense, but it effectively leaves Minnesota consumers out of the Minnesota Consumer Fraud Act as University of Minnesota School of Law Professor Prentiss Cox has lamented.