Author: Ken Verrett is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities. [email protected]
There are plenty of articles appearing now analyzing the Cuomo Agreements and the HVCC proposal. I’m going to focus on what I believe all that could mean to our appraisal businesses.
SETTING THE STAGE: WHO DID IT?
Appraisers complained for years about value pressure and the need to be insulated from it. A major player has used its annual surveys to highlight that issue for years. It has been a major topic at appraisal forums for years.
I've also stated for years that value pressure from Appraisal Management Companies (AMC) clients is non existent in our experience. I'm an average kind of guy with an average kind of business, which does an above average amount of AMC business. I'm guessing that other businesses that serve the AMC market have had the same experience.
I'm also guessing that as Cuomo canvassed the nation for the last year talking to appraisers about where the problems were, he and his staff detected the same patterns over and over. Value pressure comes from those who have skin in the transaction closing. Mortgage brokers and local loan officers who are judged by the loans they close have skin in the transaction. Many appraisers have reported that others are unable to resist that pressure. AMCs don't have skin in the game and weren't the source of value pressure. In fact, part of the role of major AMCs is to provide quality Control (QC) and review...functions formerly done by the lender, but now farmed out to the AMC. The skin the AMCs have in the transaction are in quality and service.
Cuomo, being the astute guy he clearly is, may have concluded local lenders and mortgage brokers were providing value pressure on the appraiser; that AMCs were a functioning reality which did not provide value pressure and those AMCs could in part solve the problem.
He therefore may have crafted his solution; the Cuomo Agreements and the HVCC. Appraisers got what they asked for, and as often is the case, the solution was not exactly what they bargained for....
It wouldn’t surprise me if the AMC solution was not a primary focus of the Agreements; an unintended consequence. The Agreements would let the market solve the problem of how to create the firewall between the folks with skin in the transaction. The AMCs, having been around for years and currently the firewall of choice for the major lenders, might be the likely winner.
WHO CHARGES WHAT?
One problem is not addressed in the Cuomo Agreements: the apportionment of the appraisal fee between the various parties is not always equitable and the appraiser bears the brunt of the inequality, mostly because the appraiser operates in a fully functioning perfectly competitive market, whereas the AMCs and the lenders operate as oligopolies at best. Read those two definitions in the links provided. It will help understand the rest of this column and the markets we must operate within.
A common misconception I hear is that AMCs charge the borrower much higher fees than what they pay the appraiser. AMCs don't charge the borrower. The lender does. If the borrower is being charged $395-$450 for a 1004 it is the lender who is doing that, not the AMC.
The AMCs bid like any other vendor for the right to do business with the lender. It is a very competitive bidding process, but still an oligopoly market simply because of the limited players in that market who can provide the complex services.
I imagine that the AMC acquires the lenders business at no higher than the average street value of a one off appraisal....$325-$350 for most markets. The average AMC 1004 is set around $225-$230 for most markets. That's roughly a 30 percent haircut for the AMC (225/325.)
FEE STRUCTURE HAS NOT EVOLVED AS THE BUSINESS HAS EVOLVED
That thirty percent has roughly been the haircut since the beginning of the AMC revolution. Understandable in the beginning stages of the AMC market...they had a lot of up front development costs to recover... much like a drug company needing to cover its ongoing research from the sales of drugs it brings to the market. But the industry is well over ten years old now, and it's not like the drug industry with large ongoing research efforts to fund. The development costs for the AMC industry should have been mostly one time development costs.
Furthermore, the AMC business is less labor intensive than the appraiser business, or it should be. The AMCs have much more opportunity to enjoy economies of scale, and to employ the productivity benefits that the technology revolution has given us all. Appraisers can also enjoy economies of scale and productivity increases provided by technology, but not to the same extent in my limited view of the two business models.
What that means is that over time the AMC should be able to lower their average cost of providing their services to the lenders. Over time market competition should gradually reduce the AMCs share of the revenue while still maintaining their margins and the appraiser’s share of the revenue should increase, restoring their margins.
It hasn't happened that way. Not yet. The answer as to why it hasn't happened may lie in the type of markets that are represented by each party. The AMCs are in an oligopoly market, relatively few participants, and prices are sticky. The appraisers are in a more perfectly competitive market...there are many appraisers out there vying for business. Prices are free to move with demand and supply.
SO WHO’S TO BLAME?
You could conclude that AMCs are the bad guys. However, AMCs are not the problem in my view...they do provide value to the lending transaction, and they are here to stay. The problem we appraisers face is the share of the revenue stream the AMCs currently command.
You could also blame appraisal companies like mine. We made the conscious decision to serve the AMC market eight years ago and gradually transformed our business model to serve that market. We successfully made the transition and make a profit at the current fee structure by employing as much of the productivity tools and economies of scale as we could. So in one sense we encourage the AMC's pricing to remain sticky-high for them.
But such blame would also be misplaced. Companies like mine don't set the market price anymore than you do. The market sets the price. Appraisal businesses, including mine, are in a perfectly competitive market. As individual participants we either choose to serve the market at the price offered or we don't. There is little bargaining potential.
THE COLD REALITY
The Cuomo Agreements and the HVCC in some form will be the next stage in the evolution of the first and second mortgage lending market.
If adopted in its present form, the AMC will likely gain significant market share. Mortgage brokers will be relatively little impacted...they simply transfer the appraisal ordering function from one source to another.
We will not be able to change the pricing structure in the near term. That's something to work on after the affects of the shift in business occurs, as we all settle into the new reality. It's a 2009-2010 issue.
The appraisers who built their business over the last few years on the last remaining full fee niche in the lending market (local lenders and mortgage brokers) will see many of those clients disappear and be replaced by AMCs. They'll not likely see the same number of orders (they likely enjoyed an oligopoly market in those local clients) and the former client's orders will now be dispersed among a wider appraiser base (the perfectly competitive market.)
In addition, those appraisers will shift from full fee order opportunities to appraisals at 30 percent lower fees. They will be moving from an oligopoly market position to a perfectly competitive market position.
That's going to hurt many appraisal firms. My firm took several years to manage the change. Those appraisal firms making that transition will have less than a year to adapt.
DON’T PLAY THE BLAME GAME IT’S NOT PRODUCTIVE!
It won't help those guys if they blame the AMCs for the fee decrease. It won't help if they assume firms like mine provide an inferior product for that reduced fee. If firms like mine didn't produce an acceptable quality product, we'd be cut out of the market. It's a perfectly competitive market after all, and the bad get cut much more quickly than in an oligopolistic market. Lenders and their AMCs demand quality and service. They really do.
Firms like mine have spent years developing their businesses to compete in the AMC niche. Quality and service and efficiency all had to be honed as best they could to remain competitive.
If you assume that low quality and service is what you are competing against you will do yourself a disservice. AMC's emphasize quality and service. That's what they have to provide their lender clients.
TAKE CONTROL OF YOUR BUSINESS!
If all that I have said is reasonably accurate, what choices do appraisers have? Here's my offering:
• Express your opinions of the Cuomo Agreements and the HVVC during the comment stage.
• Assume that the essentials of the agreements will survive the comment phase (maybe they will, maybe they won’t, but be prepared!)
• Play some what if games regarding the potential revenue loss and pricing mix in your business by evaluating which of your clients are at risk, and what impact that will have on your income statement and profits.
• Begin analyzing your business, product mix, clients, cost structure, and do what you can to increase productivity and reduce costs.
• Consider other full fee niche markets to replace the local lending business.
• Devise and implement marketing plans to those niches as quickly as you can.
• Don't play the blame game...what happens, happens. Focus your energies on positive things that can help your business.
That's my view.
I have the right to remain silent. Anything I say will be misquoted and used against me
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