We've talked about Acorn's experience with AMCs and our views of the pluses and minuses of those relationships. There have been a number of comments on the series, some indicating their experience mirrors ours in some respects, some indicating the experience had been quite the opposite. That's not at all surprising to me, and likely not to you.
I'm reminded of the story of the blindfolded folks trying to describe their perception of what an elephant is, each from feeling a different part of that remarkable animal. Differences are well founded and expected
What we want to do here is to share views and opinions...and let all readers come away with a broader sense of the relationships, and allow each access to a set of facts from which to base their conclusions. Some appraiser readers may simply be deciding to enter relationships with AMCs, some considering exiting those relationships. Some AMC Managers may look at this exchange and confirm that their business model is validated, some may conclude that changes might improve their business. Regulators and elected lawmakers may gain additional insights which will ultimately influence future laws and regulations.
Its a big tent I'm trying to raise here, large enough and open enough to include us all in the discussion. With the help of the readers and commenters, we should get a better picture of the real situation...not one biased in one way or another. As many of you remember, I'm for each of us making our own decisions, reaching our own conclusions. All I'm trying to do is paint a picture of what really exists. That done, make your own decision and live with it.
Today I'd like to address some myths on the appraiser side....We've seen evidence of them already from the comments that have been offered.
One Size Does Not Fit All Jonathan S. and RobB noted that clearly and well. Rural markets are quite different than homogeneous metro areas. The Fannie standard of within six months and a mile of the subject are not relevant in rural markets. It is exasperating for the rural appraiser to have to explain "those ARE the best comps" over and over. It is also a drain on profit. I say in Acorn...each time the phone rings about a delivered report we lose money. It's true of all of us when dealing with reduced fee clients. The lender and the AMC should recognize what the local lender knew years ago; each market is different! If it is efficient to centralize decision making, it is not prudent to make one size fit all! A lender/investor in loans will lose their shirts if they try to ignore those local nuances. As we tried to note in the early part of this series....the local realtor and the local appraiser are the last remaining market experts. Lenders ignore them at their peril, and lender or AMC attempts to marginalize them puts the economy in peril as well. (That last point may appear an over statement. It is not. Realtors and Appraisers are the last local experts and are crucial to the lending process.)
Appraisers Who Work Alone Produce Inferior Quality
That was inferred a couple of times in comments, and I've personally seen that view often when this subject is addressed. If appraisers think that of their competition, they might have an incorrect view of the situation which will lead them to make bad decisions.
Acorn has lost two very qualified appraisers in the last two years, and they took large books of AMC client business with them. They moved into that spare bedroom of their home. Why not? Rent is cheap there. We spent years training and educating and supporting those fellows. One left after two or three years, the other after seven years. I have no doubt that both of those individuals remain true to the ethics and quality standards we taught, preached, demanded. The quality they are now producing on their own is the same as what we demanded.
Appraisal Businesses who serve the AMC market must create an average cost business model that supports the fees and the costs the appraiser incurs. That extra bedroom office is one of the major ways to achieve that cost reduction. If you think all appraisers who serve the AMC market are inferior you have a biased and mostly incorrect view of the market. Make business decisions on that basis and you'll surely hurt yourself.
AMCs Care Not about Quality and Service
A couple of commenters made reference to that fallacy. Those who do business with AMCs know that's incorrect. How often do they receive correction requests from the AMC client? In Acorn we track that by appraiser. We want to minimize that occurrence because 'each time the phone rings....' Those calls most often are legitimate points. Acorn's company policy is that those are dealt with the same day the request arrives. High priority! We correct and return the report. If an appraiser has more than 5 percent correction requests we have a problem that Acorn needs to solve. I'm sure there are poor quality and poor service appraisers out there. But they don't last. The appraiser, the appraisal business, ends up on a do not use list and the client is lost.
It's the same with service. Miss too many deadlines without adequate explanation of the reason why? The appraiser and the appraisal business is moved to the bottom of the pecking order.
AMCs care about quality and service. They care because they are judged on those aspects by their clients. The simple fact that appraisers receive legitimate correction requests and are dunned for missing deadlines testify to AMC concern for quality and service.
AMCs Pay Market Rates for Appraisals
Read my lips....they don't as a rule. The few that do pay market rates are the exception. Anyone who suggests that the AMC Industry pays market rates are either ignorant of the current market (and shouldn't be offering an opinion publicly) or they've taken an ethics course from Ex President Bill Clinton. The typical AMC takes a 30-35 percent haircut of the appraisers typical market fee. That's a fact.
From an appraisal business owner's perspective, a haircut of 7-10 percent could be justified due to the efficiencies that a good AMC offers. However the remaining 20-28 percent haircut is obtained by the force of their having created an Oligopoly Market. That an Oligopoly Market has been created is a fact. The pricing structure of the AMC market for appraisals is a direct result of that Oligopoly.
I intend to address that Oligopoly and the resulting implications to the local, regional, national, and even global economies later. I hope commenters will read and share their views when that subject is aired. I hope regulators and elected officials (or their staffs) will read the exchange and consider how the ideas expressed can be incorporated into regulation and law which will improve the status quo of our country, because I really believe that is what is involved here.
Centralization of The First and Second Mortgage Origination Process Is Good and Necessary
Really now, good for who? Has the borrower benefited? How? Have the Financial Institutions benefited? How? Have the purchasers/investors in Mortgage Backed Securities (MBSs) benefited? How?
AMCs are an outgrowth of Financial Institution dis-intermediation which resulted from forces initiated decades ago. The S&L crisis created the opportunity for money center banks to purchase local and regional competitors. The development of the personal computer, it's powerful growth in chip processing power truly permitted centralization and data exchange virtually impossible when I began my business career. The World indeed "Flattened" as Freeman described. We are part of a global economy on a scale that was not physically possible just a few decades earlier.
As the banks centralized demands on management grew complex. Anyone who has been responsible for managing distant offices appreciates the problems. Few managers have the skills to do that well. Profits from mergers generally did not materialize as expected and cost cutting resulted. Outsourcing of operations functions resulted; customer service call centers, loan servicing, appraisal departments.
Anyone who has dealt with those functions in a local institution, even a very large one, before the Great Dis-intermediation began knows that customer satisfaction has declined in today's centralized world. Indian customer service call centers is an oxymoron and serves as the example of a depersonalized world that has evolved.
I believe that local institutions with local management and local decision makers serve their communities better than ones with national or even global centralized management and decision making. That's based on my experience as a customer over 50 years, and as a corporate manager over a twenty year span..a span that included the beginnings of that centralization process.
AMCs Are Responsible For All That's Bad in the Appraisal Profession
That is an overstatement of most appraiser's opinions. No doubt in many's minds AMCs have no reason for being, contribute nothing to the appraisal process itself. Lou M commented along those lines, but his reasoning was at least unemotional. The AMC elicits some of the most emotional responses I see in our profession. In my view that is understandable. The AMC business model has truly brought major challenges to the Appraisal profession: the reduced pricing structure combined with the dominance of the AMC as the process by which an estimated 80 percent of first and second mortgage origination demand is handled has dealt the profession major problems.
For those readers who are not appraisers, consider a business where product prices have not increased in twenty years yet operating costs have kept up with inflation over that period. Consider a business which is totally dependent on maintaining local expertize, with very limited opportunities to achieve economies of scale. Consider a business where eighty percent of the demand has been centralized into an Oligopoly which has reduced prices of the principal product by thirty percent.
How many businesses would be able to survive in those conditions?!
The obvious answer is not many. Since the conditions of the business have been brought about by the business model of the larger AMCs it is understandable that appraisal business owners would identify the AMC as the culprit.
We've hopefully established that the Appraisal Profession is essential to a healthy local economy, and in aggregate very important to the health of the national and even global economies. Shouldn't the elected officials, the regulators, even the Lenders themselves be concerned with the health of the Appraisal Profession? Isn't it in the long term best interest of all to have a healthy Appraisal Profession?
I maintain that it is not the AMC that is the problem, but rather their business model.
One Example of a Business Model Decision That Creates Major Problems
Centralization of Financial Institutions resulted in outsourcing of certain functions that were able to take advantage of economies of scale. Lower cost per transaction likely was achieved by that process. To the extent that AMCs resulted in greater productivity in the process, that's good for the overall economy.
Appraisers want our local and national economies to grow and prosper. If the outsourcing of the appraisal departments of lenders to AMCs improves the lenders business, great! There are advantages to dealing with the competent AMC as we noted earlier. Acorn could see 10-15% of price reduction from the One Off Market prices for those efficiencies. But 30-35% is excessive.
Who benefits from the additional 20% haircut? Not appraisers! The lender has reduced the expense of the appraisal department by outsourcing. The AMC has transferred some of that expense to their own business, but by serving other lenders and increasing volume they should gain economies of scale to offset some of that expense.
The lender should be willing to pay for the AMC services at least what they saved by eliminating the appraisal function. Prior to the AMC the lender was paying On Off Market prices for the appraisals. That shouldn't have changed. But it did!
The AMC should be charging the lender for the functions they perform and they should be paying the appraiser for the appraisals at the same rate as before, less perhaps that 10-15% that the appraiser finds in benefits from dealing with a competent AMC.
Lets use an example. A typical 1004 with MC whose On Off Market price is $350. The appraisal business owner might see a reasonable fee for dealing with a competent AMC to be 10% of that fee or $35. That would be a haircut to the appraisal fee. If the current business model requires and additional 20% in order for the AMC to make a profit, they should charge that fee for service to the lender....$70 for each appraisal order processed and delivered through their systems.
That would result in the lender paying $420 to the AMC, of which $70 was billed to the lender from the AMC, the remaining $350 was passed to the appraisal business, with a deduction of $35 for the AMC services to the appraisal business vendor. The Appraisal business nets $315.
Compare that to the current situation where the Appraisal Business nets $245 for that same 1004 appraisal because the AMC takes a $105 haircut from the Appraisal Business.
The current AMC business model makes a pricing decision to take too large a fee from the Appraisal Business, simply because it can. Remember AMCs have created an Oligopoly Market for their services. They have cornered 80% of the first and second mortgage appraisal demand. The top five AMCs are reported to control 80% of the AMC business. As such they operate with extraordinary power to influence the market and for twenty years they have exercised that power to demand payments from the Appraisal Businesses who operate in a fully competitive market.
That's one example of harmful business practices that can be, are imposed by Oligopoly Market participants. Isn't it time that practice changed for the benefit of all?
Next time we'll discuss the AMC Oligopoly market in more detail, and discuss some of the movements underway to bring balance to that market.
AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities.