We've had a good discussion of the volatile and emotional issue of the AMCs impact on the lending transaction and on the Appraiser Profession specifically. Several appraisers have added their views. At least two AMCs have provided their views. Many of the comments challenged my views and assertions.
It's all good.
What I hope I've established is that the Appraisal Profession is a positive force in the local, regional, national, and now global communities. Professional appraisers are one of only two unbiased participants to most lending decisions these days....the other being a Professional Realtor.
There is arguement that the Realtor in this age of declining dual agency is no longer unbiased. That has some merit. However Professional Realtors have laws governing their conduct as well as a strong code of ethics to follow. If they remain true to both, their position is largely unbiased and positive.
Professional Appraisers are unquestionably unbiased, they perform their duties admirably. We only need look at the current discourse over the causes of the current credit credit crisis and note that no one even attempts to blame the appraiser. Our job was done and done well. We know from talking to our E&O Insurers that appraisers are being named in foreclosure suits at an alarming rate, but the majority of those are lawyers casting wide nets to bring all into the mess that they can. Such is the weakness of our litigation system today.
We also contend that the AMC is a legitimate industry, has been around for decades, and serves a useful purpose...for both the lender and the appraiser. Many appraisers dispute that, several here have voiced that view and I'm glad they contributed. But those arguements don't carry the day in my view. AMCs are here and will continue to be the principal conduit of appraisal ordering and therefore demand for appraisers working in the mortgage origination niche.
It's Not The AMC That Is The Problem
My view is that the problem is not with the AMC industry, but with the business model that many have adopted, driven by the top 5 representing over 80 percent of appraisal demand. The problem with that business model is that the vast majority of the AMC volume operates by charging the independent fee appraiser for services that should rightly be charged to their client...the lender or broker.
That charge is 30-40 percent of the fee that the appraiser receives for providing their professional services. I've offered my opinion that I can see a 5-10 percent charge to the appraiser due to the efficiencies that the AMC can provide to the organized and professional appraiser or appraisal firm. But that leaves 25 to 30 percent that is a gross over charge....appraisers are paying the price in the form of that haircut for services that the lender or broker client of the AMC are receiving.
Let me state the problem in dollars. If the typical appraisal fee is $350, the appraiser is forced to pay the AMC $105 to $140 for the privilege of working with that AMC. If one accepts my view of a legitimate charge of 5 percent for services the AMC provides to the appraiser, ($17.50) then the appraiser is being over charged $87.50 to $122.50 on each appraisal they perform!
The appraiser is being forced to subsidize someone one else in the transaction. That someone else is the lender or broker client of the AMC. In a competitive market that would not happen, it does not happen.
I've stated that there are two pricing markets in the appraisal process: the One Off Market, and the AMC Market. In the One Off Market the fee to the appraiser or appraisal business is $350. In the AMC Market the fee to the appraiser is $350-140 or $210.
How Can Two Pricing Markets Exist?
Many appraisers, some commenting here, state that two pricing markets exist because of inexperienced, fraudulent, bottom feeding-corner-cutting appraisers allow it to exist.
The top five AMCs argue that the AMC Market IS the true price market by virtue of the fact that they demand and obtain the haircut from the appraiser.
Both are empty charges in my view.
The two tier pricing structure of appraisal services is a result of the Oligolopy Market that has been created by the top 5 AMCs who provide over 80 percent of the appraisal demand.
In the One Off Market the fee for a typical 1004 mortgage origination appraisal is $350. The One Off Market is a fully competitive market with many buyers and sellers of appraisal services. The price settles in at $350. If any buyer or seller attempts to influence that price...higher or lower...they are rejected. That's the way free markets work.
The AMC Market fee for that same appraisal is $210. The AMCs are able to obtain that fee because they are part of an Oligolopy. Together the top five AMCs represent 80 percent of the demand for mortgage origination appraisals. That is not a fully competitive market; that is an Oligolopy. In Oligolopies the power shifts to the few who control demand. They set the price.
The appraiser in such a market can't afford to ignore 80 percent of his source of demand. If the client requires such an ignomonious haircut the appraiser has no choice but to accept it. That's a classical result of an Oligolopy!
The No Spin Wrap Up
Remember the old phrase "What's good for General Bullmoose is good for the USA"? Originated in the Little Abner comic strip I think, and was a parody of what big business was claiming at one time in defense of the Oligolopy/Monopoly General Motors created and was using to abuse other market participants.
The last twenty years the claim could have been "What's good for the Financial Congolomerates is good for the USA." The top five AMCs are creations of large Financial Congolomerates. They created the Oligolopy Market, they set the prices to their advantage because they can.
But just as the General Bullmoose claim was false, so is this current claim. We've seen what is good for the Congolomerates is not good for the USA. The Credit Crisis worldwide is a result of short sighted business practices on Wall Street, aided by lax government oversight, ignored by legislators influenced by lobbyists.
HUD/FHA recognized that and is attempting to correct the situation by requiring unbundling of the fees reported on HUD 1 Statements to borrowers. FHA is attempting to return to One Off Pricing for all FHA loan appraisals.
HUD acknowledges that a healthy Appraisal Profession is vital to our local, regional, and national communities. They recognize a healthy Appraisal Profession is even vital to the global economy.
Professional Appraisers agree. They should be supporting HUD/FHAs courageous effort to correct the situation.
The largest threat to the Appraisal Profession is the Pricing Structure created by the Oligolopy of the top AMCs, who were created by the large national financial institutions, and which force appraisers to pay for the benefits those same lenders receive from outsourcing their appraisal departments to the captive AMCs.
Professional Appraisers have endured that Oligolopy enforced artificial pricing for long enough. It has weakened the Profession which is vital to our local, regional, and national interests. That Oligolopy has forced the appraisal businesses to accept fees which are below that necessary to maintain a competitive and profitable business.
The Lenders themselves are damaged when the Appraisal Profession is weakened. A healthy Appraisal Profession provides underlying value support for the CMOs that the golbal market invests in today, and those CMOs are vital to the continuing business of the national lenders and mortgage brokers.
The time has come to change the AMC business model. Charge a fair price for the services provided and charge it to those who receive the benefits. Eliminate the haircut to the appraiser. Charge the Client for those services. Do that and the single most damaging problem in the mortgage origination market will be resolved.
Next time we'll discuss the one remaining thing that must be changed in the current AMC business model in order to restore the Mortgage Origination market to a fully competitive state where all can participate and which supports our local, regional and national communities best. (Hint...we identified that in the first of this series.)
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.