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The risk management landscape for real estate professionals seems to be transitioning to a new stage with changing economic trends including relaxed lending rules, lower unemployment and gas prices, all likely
resulting in an uptick in the housing market. The evolving valuation world will now be faced with the new
Collateral Underwriting (CU) procedures. Depending on one’s perspective, CU is either a blessing or a curse. How will these changes impact real estate professionals ability to successfully perform their duties while avoiding the pitfalls that lead to missed opportunity, malpractice insurance claims or licensing complaints?
Easy Money
While the factors that led to the “Great Recession” were numerous and complex, it would not be an overstatement to include the all-too-available mortgage dollars, relaxed borrowing standards and minimized industry oversight that allowed the unscrupulous to take advantage of the situation and further compromise the financial and housing markets. Many professionals and members of the public otherwise made decisions that contributed to the financial woes. The government and industry responses were numerous and a combination of helpful, confusing or painful, depending on one’s professional perspective. Dodd-Frank, UAD, HAMP, the AMC appraisal format and other regulatory intervention (often resulting in large fines and sanctions) did have some effect on calming the market. One ancillary consequence of the recession was a significant increase in professional liability insurance claims against real estate professionals which includes appraisers, agents, title agents, mortgage brokers and even real estate attorneys. Another was a purging of professionals from the licensing roles, most notably appraisers, whose licensed numbers are reduced up to 20 percent in some locations.
Nevertheless, the economy has improved as has the housing market, according to many sources. Trulia’s Q4 2014 Housing Barometer states that three of its five indicators—existing home sales excluding distressed sales, home price level and delinquency plus foreclosure rate—are all moving back towards “normal.” (Their other two indicators are new construction starts and employment amongst the millennial 25-34 year old age group which did not show significant improvements). CoreLogic’s November National Foreclosure Report states that there was a decrease of over 35 percent of homes in the United States in some stage of foreclosure between November 2013 and November 2014.
Further optimism results from factors including FHA lowering insurance premiums for low income and first time buyers, Fannie and Freddie lowering down payment requirements, and declining fuel prices. It is perhaps the lowering of down payment requirements that brings about the most hand-wringing. Many see this as a way to bring buyers back in the market to ease the credit crunch. Others see it, along with proposed bank deregulation in our new House and Senate, as déjà vu all over again inviting abuse and the return to the problems of the previous decade.
Whatever view one takes, these dynamics will test the skills of agents, appraisers and other professionals as the market becomes more active.
Valuation
The valuation industry, no strangers to a housing market in flux, will see changes in 2015. On the horizon are potential modifications in Dodd-Frank, additional State legislation of AMC’s and CU. It is the latter that seems to draw the most concern from valuation professionals. The CU program, developed by Fannie Mae, is designed to grow a database of 
alternative property sale comparisons to compare against comps used by the professional appraiser. The database will then be used as part of an appraisal review with FNMA’s goal to reduce the rejection rate of appraisals by FNMA through better screening at the lender level. The catch for appraisers, according to a variety of industry sources, is that only lenders and their third-party affiliates (i.e. Appraisal Management Companies) will have access to this database. Appraisers will not. The originating appraiser will only be able to learn if the CU database has “better” comps than the one used in the appraisal upon return of the report, which then could extend the loan processing time and potentially increase the cost. Appraisers further state that they were the ones to develop the information in the database in the first place, so why be denied access? Making the database available to appraisers could speed up the appraisal and lending process as the original appraisal could utilize the CU comps, or more immediately respond as to why they were not used. Several appraisal organizations are attempting to address this through petitions and/or letters to government officials; many others are offering classes and seminars on how to manage CU requirements. One thing for sure is that increased demands on the appraisal process also increases the risk involved in preparing the report, potentially leading to another spike in liability issues for boots on the ground appraisers.
Risk Management, Insurance and the Real Estate Professional
No matter what segment of the real estate profession one practices in, incorporating a working knowledge of local and national economic and regulatory trends diminishes risk to one’s practice. The likelihood of new and first time buyers into the market creates great opportunity, but also demands that professionals step up their game to properly serve these new clients and all involved parties. Liability is reduced when a professional is aware of and acts fully in accordance with all 
expectations. It is also reduced when there is an awareness of the total transaction, recognizing each party’s role with the mutual goal of serving the clients. Far too many liability claims bring in multiple parties, even the professional who appears to have performed their task without error or omission. But a client who is dissatisfied with one part of the transaction will often become dissatisfied with the whole experience, bringing claims of malpractice or impropriety against everyone involved.
Disclosure and valuation, against real estate agents and appraisers respectively, remain the biggest categories of malpractice claims. Drilling deeper into these broad categories often reveals that it was insufficient communication amongst professionals that resulted in the client’s dissatisfaction. Someone who views and participates in the transaction based on their own singular roles may miss important facts. Thus, an inspection issue becomes a lawsuit against the agent. A failure to disclose allegation against the agent becomes a valuation claim against the appraiser and so on. Defending yourself against the error of another professional requires due diligence and awareness of what everyone is bringing to the deal. The litigious environment of the housing world in the last decade has diminished only slightly. Improving economic factors are steering us back to some kind of stability. Increases in errors and omissions insurance premiums have moderated, and underwriting is more flexible. It remains to be seen if real estate professionals can together embrace the coming changes on behalf of the industry and consumer.
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John L. Torvi is the Vice President of Marketing & Sales at the Herbert H. Landy Insurance Agency of Needham, MA. A 25 year veteran of the insurance industry, he is a frequent contributor and speaker regarding risk management and professional insurance issues. He can be reached at johnt@landy.com or 781-292-5417.