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Is appraiser liable to unidentified lender?

(ran HL, HN editions)

National Home Loans Inc. hired certified real estate appraiser Gary to appraise a home. Gary previously appraised approximately 200 homes for National Home Loans Inc. He appraised the house for $670,000.

Relying on Gary's appraisal, a profit sharing plan trust invested $50,000 in a second mortgage secured by the house. The first mortgage balance was approximately $341,000.

After the second mortgage was funded, the borrowers defaulted on the first and second mortgages. The second mortgage lender then learned the true value of the home was only $450,000. The profit sharing plan trust would not have made the loan if the appraisal was correct.

As a result, the second mortgage was wiped out when the first mortgage lender foreclosed. The second mortgage lender sued both National Home Loans Inc., the mortgage broker, and Gary, the appraiser, for fraud, negligent misrepresentation, suppression of fact, and breach of contract. National Home Loans settled for $250,000.

If you were the judge, would you hold appraiser Gary liable for negligent misrepresentation damages for overvaluing the house?

The judge said YES!

Although appraiser Gary did not know who would rely on his appraisal, the judge explained, when he was hired by mortgage broker National Home Loans, Inc. Gary understood his appraisal would be relied upon by a third-party mortgage investor.

When an appraiser has reason to know the appraisal will be relied upon by potential investors, the judge continued, the appraiser becomes responsible for the accuracy of that appraisal to the unknown third party.

The courts of several states have held appraisers liable for negligence to unnamed third-party beneficiaries, so there is no reason not to hold Gary responsible, the judge ruled. A real estate appraiser who knows his appraisal will be used by unknown third parties can be held liable to them for negligent misrepresentation damages, the judge concluded.

Based on the 1996 California Court of Appeal decision in Soderberg vs. McKinney, 52 Cal.Rptr.2d 635.