[CPEO-MEF] Community Right-To-Know; Appraisal Disclosures

[CPEO Moderator <cpeo@cpeo.org>]

COMMUNITY RIGHT-TO-KNOW; APPRAISAL DISCLOSURES
By John Yelenick
<yelenick@earthlink.net>

December 23, 1999

 On June 10, 1999, the Federal Housing Administration (FHA) announced a
series of reforms to assure that homebuyers receive thorough appraisals of
their prospective homes and complete warnings of any defects.  Under the
plan, appraisers must provide a much more detailed evaluation of the
condition of homes, including any environmental problems or other impacting
factors. The FHA will not insure the mortgage on the home until the
defect(s) are remedied.

 Since December 19, 1991, as found in the Equal Credit Opportunity Act, you
as a loan applicant who has paid for an appraisal used by the lender to
evaluate your credit application, are entitled to a copy of the appraisal
report if you request it in writing.

 Since September 10, 1979, the U.S. Department of Housing and Urban
Development (HUD) has had an indefinite policy (Notice 79-33) that "No
existing property can be accepted for mortgage insurance where a hazard is
known to exist that will affect the health and safety of the homeowner ...
and complete disclosure shall be made to purchaser's in a form approved by
the Secretary".  Finally, on September 27, 1996, HUD finalized rules that:
" (i)(1) It is HUD policy that all property proposed for use in HUD
programs be free of hazardous materials, contamination, toxic chemicals and
gasses, and radioactive substances, where a hazard could affect the health
and safety of occupants or conflict with the intended utilization of the
property"... " (3) Particular attention should be given to any proposed
site on or in the general proximity of such areas as dumps, landfills,
industrial sites or other locations that contain industrial wastes.

 The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 (CERCLA) attempts to shield from liability for clean-up costs
landowners who acquire property without knowledge of pre-existing
environmental conditions on that property, i.e. "innocent landowners". To
qualify for this narrow exclusion, however, Congress actually created as an
element of each real estate transaction: a duty of inquiry, by the
Purchaser, into the ownership and uses of the property.  Sellers who
transfer property with actual knowledge of a release of hazardous
substances are required to disclose their knowledge or lose the
availability of the Section 107(b)(3) defense.

 The November 1991 Environmental Protection Agency (EPA) policy
entitled:Homeowners Exempted From Superfund Cleanup Costs declares that the
"average homeowner will not be required to conduct or pay for cleanup when
residential property is part of a federal Superfund site... unless their
actions have lead to a release or threatened release of hazardous
substances requiring cleanup of their property".  However, to come within
the scope of this policy, owners of residential property must: (1) provide
access to the residential property when requested by
the EPA; and (2) residential owners must cooperate with EPA and not
interfere with any of the Agency's activities on the residential property
taken to respond to the release or threat of release; and (3) residential
owners must comply with institutional controls placed on their residential
property.  Finally, the residential owners may not rely upon this policy,
and the EPA may take action at variance with the policy.

 The August 3, 1995 National Priorities List (NPL) listing policy stresses
that NPL sites "are not based upon property boundaries, but rather the
areas of contamination"; (e.g., contamination may extend beyond the source
property due to contaminant migration).  A EPA survey revealed that 95% of
the distance from the groundwater contamination site (source property) to
the areal groundwater boundary were within 2
miles from the contaminated source property boundary; accounting for 95% of
the plumes studied nationally.

 Real estate brokers/appraisers represent themselves to the public as
possessing knowledge, ability and skill in the field of real estate. The
profession owes to the public the duty of exercising reasonable competency,
judgement and care in advising and rendering services. Therefore, the
profession must keep abreast of social, economic and legal developments
affecting property.  Newly revised State of Colorado real estate contracts
attempt to address these issues in the Seller's Property Disclosure, and
the standardized contract terms: Appraisal Provisions, Evidence of Title,
and Title/Title Advisory  provisions. Additional mandates include 'material
fact' disclosure requirements, the Colorado Consumer Protection Act, laws
governing 'public nuisance', 'negligence', strict liability', 'fraud and
misrepresentation', 'duty of care/good faith performance' etc.  However,
appraisers now also have a
mandate to disclose "readily observable" environmental conditions - meaning
'easily observed and able to be carried out without much difficulty or
expense' (a legally undefined term as of this writing).

 On July 29, 1999, HUD announced a plan (Affordable Housing Goals) to boost
the amount of mortgages available to low and moderate-income families over
the next decade by more than 20% (from 42% of its portfolio to 50%) in an
attempt to diminish the home ownership marginal pace of growth between
minorities and lower income families.  The implications of "Environmental
Justice" will surely be tested assuming full environmental disclosure.

 Within the May 1, 1997 "Community Right-to-Know" EPA statement, EPA
acknowledges that "One purpose of federal regulations is to address
significant market failures. Markets will fail to achieve socially
efficient outcomes when differences exist between market values and social
values. Two of the causes of market failure are externalities and
information asymmetries. In the case of negative externalities, the actions
of one economic entity impose costs on parties that are "external" to the
market transaction. For example, entities may release toxic chemicals
without accounting for the consequences to other parties, such as the
surrounding community and the prices of those entities' goods or services
thus will fail to reflect those costs. The market may also fail to
efficiently allocate resources in cases where consumers lack information.
For example, where information is insufficient regarding toxic releases,
individuals' choices regarding
where to live and work may not be the same as if they had more complete
information. Since firms ordinarily have a disincentive to provide
information on their releases and other waste management activities
involving toxic chemicals, the market fails to allocate society's resources
in the most efficient manner. This rule is intended to ameliorate in part
the market failure created by the lack of information available to the
public about the release and other waste management activities involving
toxic chemicals, and to help address the externalities arising from the
fact that market choices regarding toxic chemicals have not fully
considered their external effects. Through the provision of such data ...
overcomes firms' disincentive to provide that information, and thereby
serves to inform the public of releases and other waste management of toxic
chemicals. Individuals can then make choices that better optimize their
well being. Choices made by a more informed public including consumers,
corporate lenders, and communities, may lead firms to internalize into
their business decisions at least some of the costs to society relating to
their releases and other waste management activities involving toxic
chemicals. In addition, by helping to identify hot spots, set priorities
and monitor trends, data can also be used to make more informed decisions
regarding the design of more efficient regulations and voluntary programs,
which also moves society towards an optimal allocation of resources.

  If EPA were not to take this action ... market failure (and the
associated social costs) resulting from the lack of information on the use
and disposition of toxic chemicals would continue. EPA believes that ...
action will improve the scope of multi-media data on the use and
disposition of toxic chemicals.  This, in turn, will provide information to
the public, empower communities to play a meaningful role in
environmental decision-making, and improve the quality of environmental
decision-making by government officials. "

Regards,

John Yelenick
Rocky Mountain Arsenal  Restoration Advisory Board
Rocky Mountain Arsenal Site Specific Advisory Board
JOHN J. YELENICK REALTY
ENVIRONMENTAL ABSTRACTING (Service Marked)



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