GUEST 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.
It’s hard to believe but it has been over three years since the appraisal profession was turned upside down by the Home Valuation Code of Conduct (HVCC). While HVCC has been relegated to the ash heap of history, its primary intent is alive and well thanks to the adopted language within the Dodd Frank Act and subsequent regulation that it continues to produce.
Now that some time has elapsed, appraisers are becoming more accustomed to the realities of a post-HVCC world and can hopefully speak more rationally about the impact it has had. It is clear however that new dynamics are in play.
The use of Appraisal Management Companies (AMCs) was not directly mandated but their proliferation was the natural result of a system that redefined who appraisal clients were supposed to be. Appraisers did not have much say in this outcome and were left struggling to find an identity and more importantly, a business model that was profitable. As appraisers strive to adapt to ever changing processes, it is unlikely to alter the fundamental flaws that remain with the AMC-based model.
An Ever-Expanding Role
AMCs may offer a perfectly viable service for outsourcing appraisal ordering and processing functions to investors, however their role could be growing far beyond that. Lenders appear to have accepted the AMC as a kind of underwriting function. After all, if an appraisal has two comparables under 90 days, two listings, all lines are bracketed, and it has all the required canned comments, then it must be a quality report; right? Well, as any practicing appraiser knows, every assignment may not look the same yet this is what AMCs are promising their clients. Quality control departments routinely generate stipulations that have little to do with quality and more to with demonstrating that their place in the process is justified and beneficial. This will ultimately lead to lenders having a false sense of
security regarding collateral valuations.
The AMC Role Wrongly Defined
Generally speaking, AMCs are not really appraisal providers in the sense that independent fee appraisers are. They would more accurately be defined as appraisal facilitators. That is, a secondary party that locates and handles ordering and delivery. The local appraiser is the one who provides the market expertise, has the required tools to produce a report, has the credentials to complete assignments, pays the costs of all required expenditures, and most importantly has the liability that lenders desire. The AMC serves primarily as a transit system and yet they collect a high percentage of what borrowers think is the appraiser’s fee. This of course is easy to disguise since appraisal
invoices are often submitted separately to the AMC. Fees to the consumer have clearly increased as
appraisers have been relegated to the wholesale end and the AMC has become a retailer.
Lack of Transparency
The HUD-1 settlement statement has historically only disclosed a singular appraisal fee but recent regulatory actions are changing this. The Consumer Financial Protection Bureau is proposing adding a line for appraisal management fees which does offer a bit more transparency but will likely not change what AMCs are paying independent appraisers. AMCs state that the fees they collect are customary and reasonable however C&R actually has nothing to do with them. The reason why the concept of customary and reasonable was fought for in the Dodd Frank Act was due to appraiser outrage over slashed fees. When these changes are finalized in the HUD-1, will AMCs charge a separate fee and support appraisers receiving the full fee that has been paid over the past few years on the settlement statement?
Scope Creep, Slashed Fees, and Unreasonable Turn Times
The AMC model has also allowed a tremendous amount of scope creep to occur without fee increases to offset the additional work. This adds further stress to an industry that has already seen significant fee reductions from pre-HVCC rates. In order to streamline their processes, when a lender client demands a
particular requirement for an appraisal, AMCs often make it standard for all reports which increases workload across the board. This results in more hours of work to produce the same pay and the net loss of revenue gives birth to other problems.
Disgruntled Appraisers
By reading any appraisal forum, trade publication or blog post, it’s not hard to see that the vast majority of appraisers are not big fans of AMCs. Many feel they are taken advantage of or taken for granted. This is the natural outcome of a system that typically does not foster a communicative business relationship. If you are just another reference in a large national database, then you will likely be treated that way. If AMCs are to be the standard for years to come, then it is in their best long-term interest to address this
concern. Treating appraisers equitably should be their goal as well as to reduce the “fast and cheap” mentality that permeates many AMCs.
A Future Generation of Appraisers
There is a lot of talk about the difficulties of getting into the appraisal business. Since the financial collapse, HVCC and Dodd-Frank, the number of licensed/certified appraisers has dropped off dramatically. These estimates also do not take into consideration the additional numbers who might be keeping their license active yet do not actually work in the business any longer. With the average age of an appraiserapproaching 60, AMCs and lenders will likely be a catalyst in how we address this concern.
While reduced volume, slashed fees and expanded scope of work may have contributed to a decline in the number of active appraisers, oneissue does not get discussed often. That is the difficulty in hiring and training new appraisers by local appraisal firms. Once licensed, fewer appraisers are willing to work in a fee split arrangement for a local firm when they can simply sign up for AMC work and have enough work to keep busy. This results in local firms having less flexibility to develop new services and
efficiencies. AMCs probably benefit most from working with one-person operations that have a small pool of clients andlittle flexibility to turn their work away.
Firewall Fallacy
During the buildup to the sweeping changes, there was a lot of talk about needing a barrier between loan origination and appraisers. Regardless of the merits or pitfalls of this theory, the AMC in no way serves as a firewall. If a conflict of interest existed before, how does placing a for-profit entity in
the middle solve anything? If origination could pressure the appraiser, then surely they can pressure the AMC by threat of taking business elsewhere. If the AMC’s profit becomes at risk, then the possibility certainly exists for pressure to filter down to their appraiser contractors.
Volume Will Hurt AMCs
Refinance activity has picked up in recent months and AMCs are seeing a significant increase in the number of orders that are being declined. If the economy and housing begin to rebound, increased volume will work against AMCs. If an appraiser has so much work that affords them the luxury of choosing clients to work for, the AMC will likely be on the bottom of the list of preferred clients. The positive in this is that fees could rise and turn-time expectations might soften.
Inevitable Outcomes
With AMC legislation enacted in many States and pending in many more, AMCs are also in an ever-changing landscape. Hopefully they will realize that their survival is dependent on the health of the independent local appraiser. The concept of local appraisers doesn’t always mesh with the global view of large scale appraisal users but nonetheless is essential to a sound appraisal process. AMCs are clearly in the driver’s seat if their relationship with appraisers is to improve. It’s really very simple; AMCs don’t even have a business without local appraisers. They must come to grips that some of these outcomes are inevitable unless they alter their business model to some degree.
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:[email protected] web address: www.amappraisals.com
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