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S.2452 - Home Preservation and Protection Act of 2007


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Editor’s Note: Recently, an OREP member who has his E&O insurance with us asked for clarification of the bonding provision for appraisers contained in S.2452- Homeownership Preservation and Protection Act, which is currently under consideration in the U.S. Senate. There are several key points to understand about bonds, none of them pretty. You’ll find S.2452 posted in its entirety at WorkingRE.com (sidebars).
 

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The principal (you) pays a percentage of the bond amount called a bond premium. In return, the surety (often times an insurance company) extends "surety credit" to make the required guarantee (the bond). A claim can arise when the principal does not abide by the terms of the bond. In the event of a claim, the surety will investigate to ensure that it is valid. If the claim is valid, the surety will look to the principal (you) to pay the claim and any associated legal fees.

So the first key point is that the bond is not insurance, it is a form of credit where the principal (you) is responsible to pay any claims. Because it’s not insurance, it is likely that appraisers will continue to carry E&O in addition to the bond.
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Cost
Finally, there is the issue of cost, which probably is foremost in the minds of most appraisers who are upset about this requirement, and for good reason. With the market slow, cut rate AMC work on the rise and the cost of most everything else going up, especially fuel, appraisers need another expense like they need a hard drive crash.

In our experience, bonds typically cost about one percent of the amount to be bonded. So it would cost about $500 for a $50,000 bond.

The bonding language in S.2452 requires a bond for “not less than one percent of the aggregate value of all homes appraised by an appraiser of real property in connection with a home mortgage in a calendar year...”

The OREP insured who contacted us provided these numbers from his own business: this California appraiser said to figure $350,000 per home for, say, 15 homes per month or $63,000,000 in aggregate value per year. So, at the one percent threshold requirement, his bond needs to be for a minimum of $630,000. This would cost

him about $6,300 additional a year.

This amount may be manageable for some appraisers but certainly not for others. Indeed for some, it may be the final straw. In any case, it sure makes his $600 annual E&O insurance premium look pretty good, especially since the E&O is designed to respond to a covered claim, including defense costs up to his limit (after the $500 deductible is satisfied).
 

This bonding provision for appraisers in S.2452 deserves your attention. You will find the contents of S.2452 at WorkingRE.com (sidebars). You can locate and provide feedback on this Bill to your state Senators here: http://www.senate.gov/general/contact_information/senators_cfm.cfm.

This story is not intended to offer any specific advice on insurance or bonding.

About the Author

David Brauner is Editor of Working RE Magazine and Senior Broker at OREP.org. He can be reached at dbrauner@orep.org. Calif. Insurance Lic. #0C89873

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