AUTHOR: Micheal W. Armentrout, VP AM Appraisals, Inc. Mike has been involved in full time real estate valuation since early 1992 and has experience in numerous Central Ohio markets.
The review and possible adoption of the Home Valuation Code of Conduct (HVCC) in early 2009 has the entire appraisal industry biting its nails in anticipation of the Federal Housing Finance Agency’s final decision, but what does this really mean?
It certainly leaves few options except for the majority of lending based appraisal work to be distributed by Appraisal Management Companies (AMC’s). This means that no loan tied to Fannie Mae, Freddie Mac or HUD can have an originator who stands to profit from that loan, request a valuation directly from an appraiser. Since most appraisers at least understand the basics of the AMC model, I thought it was time to give a basic analysis for those readers who are not familiar with the appraisal process.
[Wells Fargo Wholesale Lending has issued an Appraisal Order Training document for brokers to use one of four approved AMCs. Fee schedules are included: Download WellsFargo_Appraisal_AMC_HVCC_Appraisal_Process.pdf (252.1K) ]
Having been around for over 15 years, the premise of AMC’s is a solid concept in that it offers lending institutions a method to outsource appraisal ordering, tracking, and quality control. This lessens the burden on lenders to maintain complex networks of personnel which have historically had to implement appraiser approval and removal procedures as well as in house reviews and audits of appraisals. The cost savings factor is obviously appealing, particularly in light of the current financial woes of the banking crisis.
Secondly, AMC’s have been viewed by policy makers and governmental agencies as a potential solution to a problem that many appraisal professionals have been drawing attention to for years; pressure on appraisers to obtain specific values. By eliminating pressure for pre-determine values, the belief is that this would also negate an appraisers fear of reprisal or loss of a client based on a lower than expected value conclusion and the result would by truly unbiased valuations. For this reason, HVCC was initially supported by many appraisers but has since caused the majority to change their opinions as months of analysis have led to a dramatic opposition to its implementation.
With these positive sales points for AMC’s, many might conclude that they are a viable fix for the entire finance process but as with most things, there is another side to the story.
AMC’s are often large national giants that employ the use of clerical staffs that have little if any appraisal experience and therefore do not fully understand the complexities of the valuation or loan processes. This requires the utilization of strict protocol that is so automated that appraisers often can’t get basic questions answered in a timely fashion. This middle man mentality results in an environment where appraisers become “form fillers” and not writers of reports that fully analyze and reconcile market data into a supportable value conclusion.
Even though most management organizations use teams that are assigned to specific geographic regions, communication is commonly difficult to establish. Traditional business relationships are difficult to maintain with AMC’s due to the inability to talk to the same contacts on a regular basis. Their internal databases are the only link to appraisers nationally and sporadic requests will require appraisers to shift their focus from obtaining quality clients to obtaining a quantity of clients, making lasting business relationships more unlikely. Simply put, if an appraisal company historically did 1000 valuations per year for a handful of clients, the AMC system of random assignment dispersal may then require exponentially more clients to equal their prior case load.
Most AMC’s promise their lender clients prompt turn-around times from the ordering of an appraisal to receiving a completed report. This has always been an industry expectation, but more complex appraisal assignments require in depth research that can take significantly longer than usual to complete. Many AMC contracts state their right to cancel orders based on delays and appraisers might be pressured to rush or even leave out proper steps to a credible conclusion in order not to upset an AMC client.
Without a doubt, the largest concern of appraisers is the trend of AMC’s to have fee schedules that are reduced by as much as 50% of traditional market rates. A basic understanding of economics would indicate that this will prove to be a factor in the lowering of appraisal quality nationwide. To work for these slashed fees, will clearly require appraisal professionals to search for new methods of efficiency but will more likely cause corners to be cut to equal out their loss of accepting the lower fee. It should also be known that these rate cuts are not passed along to the lender or borrower as savings. In fact, appraisal rates have often been increased on the front end for the AMC’s cut of the fee to be more than the licensed or certified professional who actually completes the assignment. The appraiser maintains the same amount of liability and costs while the AMC reaps the lion’s share of profit.
As a side note, many smaller AMC’s do exist which are appraiser owned and operated. They are shining examples of success due to their understanding that quality is often sacrificed by fee reductions and unrealistic timeline requirements.
To date, there is little regulation on AMC’s and many of the largest are at least partially owned by lending institutions. The current version of HVCC does stipulate that an AMC could not order an appraisal if it was for its parent company but many would argue lender-owned AMC’s to be an inherit conflict of interest for lenders to profit from the appraisal process regardless of such a provision.
If there is one thing appraisers want lenders and the general public to understand, it is that attempts to make appraisals better and more reliable is a worthy cause and one that our profession has fully embraced throughout the past. We however do have legitimate concerns that a totally AMC-based system would cause qualified and experienced real estate appraisers to leave the industry while those willing to produce sub-par reports may flourish. In the end, Americans could end up with a bigger financial mess than we have currently.
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AUTHOR: Micheal W. Armentrout, VP AM Appraisals, Inc. Mike has been involved in full time real estate valuation since early 1992 and has experience in numerous Central Ohio markets. He served as a staff appraiser at several local firms before forming AM Appraisals, Inc. with business partner J.M. Massey. e-mail: marmentrout@amappraisals.com web address: www.amappraisals.com
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