Appraisal Scoop

Runt Rants - A "Two Tier Pricing Structure" for Appraisal Services

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. Overview

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. 

Both AMCs and Professional Appraisers Are Important and Necessary

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.

Runt Rants - The Good and the Bad - AMCs from the Appraisal Business Perspective

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.

Background

Last week we provided a brief history of the Appraisal Profession and the Appraisal Management Company (AMC).  We received good comments from appraisers and an AMC who shared their thoughts on what was written.  Very helpful folks, thanks!  The week prior we discussed the Coester Survey, an AMCs survey results of their appraiser panel survey...what we agreed with in our experience, what we didn't find as representative of the market as we saw it.  Good comments from folks there also...and another great help.

Our intent is to set the record straight...no spin allowed...as our appraisal firm sees the market from a major MSA in the country.  We've all seen the influence of public writings on our profession.  Look no further than the HVCC impact...a result in part of the New York Attorney General reading the October Research Survey Results which proclaimed over several years that their Appraiser Surveys reported Value Pressure  a major problem in the market...one problem appraisers evidently couldn't control themselves.   

The Coester Survey was an example of public writings that generally spoke to an issue of the day....one of which was appraisal fees paid by AMCs...but their findings and conclusions were opposite of what appraisers have been reporting for years.  If we don't set the record straight with reasoned alternative views, we'll have yet another well meaning effort to solve problems that don't exist...or which produce changes which make matters worse because the true picture was misconstrued.  Not that Coester spun their results...it's just that their results weren't reflective of the market.

Why Is This Important?

Professional Appraisers must answer to the requirements of our Profession (USPAP), Regulators (State License Departments), and our Clients.  Appraisal Businesses must also conduct our appraisal activities within the prudent constraints of good business practice.  If we don't meet both of those needs, we'll eventually be out of business. 

We hopefully established last week that Professional Appraisers provide an important role in the real estate market, both Residential and Commercial...a market that represents a key component of our country's Gross Domestic Product, and indeed a major component of the world economy.  The current global recession started with the collapse of the USA residential lending market, and we are still trying to recover worldwide from that crisis.  That's support enough to emphasize the importance of maintaining a healthy market in which all participants can contribute and be compensated adequately for their contributions.

Appraisers didn't cause that market collapse, if anything we reined it in somewhat.  In the current environment of various groups trying to recommend changes to prevent another credit crisis from occurring, we'll see many views written, recommendations floated. 

Some recommendations will be made to correct certain elements of the market. Appraisers and Appraisal Businesses will be affected by those recommendations.  It is important to the US economy and even the global economy that the facts are presented without spin, that recommendations are made based on those facts, not on misconceptions. Congress, Regulators, Lenders, AMCs, Appraisers, all need the facts. 

AMCs From An Appraisal Business Perspective

Appraisal Management Companies have been around for decades, but have come to dominate the market within the last 15-20 years.  Major lenders sought to outsource certain functions in an effort to achieve greater efficiency and lower cost.  The Appraisal Department was one of those functions outsourced.  Most major lenders have done that now, often by spinning off major functions of the appraisal department to another entity in which they sometimes maintain some ownership and control. 

It has been estimated that 80 percent of the residential valuation products are ordered through AMCs.  It has also been estimated that the majority of the AMC business nationally is done by the top 3-5 major firms.  AMCs are now a major funnel of appraisal demand from the lenders and brokers, and they represent a major client niche for the Appraisal Profession. 

The larger AMCs function as a classic Oligopoly Market, in which those few providers define and influence the market within their sphere of control.  It is quite factual to state that two markets now exist for residential appraisal services; the AMC Market, and the Lender/Broker/Special Use Market, referred to as the 'one off' Market.

What's Good about AMCs from Our Prospective

As noted before, Acorn is a major supplier of appraisal products in the Houston MSA for AMCs.  Years ago we determined that they would be a major factor in the business for the future and we organized our business to serve them, and we market to them, now serving up to twenty AMCs on a regular basis.  We also provide our services directly to lenders and brokers who prefer to deal directly without the AMC middleman; the 'one off' market.  In our twenty year experience with most of the major AMCs, here is what we find good about the relationships.

AMCs provide a steady and dependable volume - Whether it's five orders a day or five orders a week, that volume forms the foundation of our work flow and creates certain efficiencies within our business. 

AMCs provide efficient communications channels- Most are web based portals which allow communications back and forth to be posted and the history of the assignment retained automatically.  The Scope of Work, contact details, pertinent data, unusual conditions, are usually posted on web sites for download or sent as attachments to the order form as a PDF document.  We strive to establish an honest and friendly relationship between our Administrative Manager and the AMC staff to handle all but appraisal issues.  The AMCs tend to do the same.

AMC staffs are reasonably knowledgeable of Appraisal Issues- Most AMCs train their staffs and provide clear procedures to guide them.  Our experience is they are also open to being educated about special situations relative to our market.  Our staff appraisers are trained to be non confrontational in dealing with appraisal issues when informing the AMC staff of those special situations that occasionally develop.  We don't take the position of preaching, but rather of informing.  It generally works.

AMCs provide no value pressure- We can't remember the last time an AMC tried to influence our value conclusions.  That's a huge plus in dealing with the client....the issues are very straight forward and clear cut, and never about hitting a certain value.

AMCs often provide quality control- Many AMC clients conduct reviews of our reports for certain technical requirements, and will return those for correction before the report is delivered to their customer.  We never like to receive such returns....but they become high priority for the appraiser when they do arrive.  We strive to correct and return all such returns within the same day.  Such efforts on the AMC's part aid us in ensuring quality to our end client...something we both are interested in achieving.

AMCs process invoices on dependable schedules - We do very little follow up on outstanding invoices.  We experience very little collection losses.

That's not a small list of positives AMCs bring to the market.  Not all AMCs provide those strengths, but most provide the majority of them.

What Could be Improved From Our Perspective

Most business relationships can be improved. That's certainly true of the relationship we have with AMCs.  I'm a reasonable entrepreneur.  I don't expect to be protected from the market.  I expect to compete for business on quality, service, and price.  I acknowledge it when someone else provides better quality, service, and price.  I hope others share that approach.  That is certainly the spirit in which this is written.  There are two policies that could be changed in the AMC market, and if they were, the niche would be profitable and a positive contributor to our economy for many years to come.

AMCs should acknowledge the existence of Appraisal Firms in Addition to Individual Appraisers - Many appraisers operate as a sole proprietor, with a single appraiser.  Many operate as a Partnership or C Corporation with a staff of appraisers. The multi appraiser firm tends to be a Partnership or C Corp. 

There is a long tradition in the industry for specifying the name of the appraiser when placing an appraisal order.  That should remain an option.  Historically, the lender/loan officer had relationships with the appraisers and they were comfortable and confident in that appraiser's opinion.  Where that continues to exist, it should be allowed. 

However, the tendency now due to the centralization of the loan underwriting and decision process is that those personal relationships are much less frequent or important.  The HVCC requirements for a firewall between the lending officer and the appraiser make that personal relationship even less prevalent. 

In multi appraiser firms, it is the Appraisal Firm that trains and supervises the quality and performance of the staff appraisers.  It is the Appraisal Firm that carries the E&O Insurance, that monitors service commitments, that maintains the proper license status of it's appraisers. 

AMCs should adopt the policy of assigning orders to the Appraisal Firm when orders are placed, rather than to individual staff appraisers.  Many do.  A few do not.  The few that do not create significant inefficiencies in the performance of the Appraisal Firm, inefficiencies that over the long run impact service and quality.  Let the Appraisal Firm determine who best among their staff can handle the assignment.

Studies in Acorn suggest that having the Appraisal Firm assign the order to the appraiser best suited for that assignment results in a 30 percent improvement in field efficiency in our firm.  That is huge.  The efficiencies are brought about principally by allowing the Firm to schedule assignments in large Metro areas grouped by location. 

For example, Certified Appraiser A has two assignments scheduled for field work tomorrow morning.  A third assignment arrives within that same quadrant of the market.  It is immediately assigned to Appraiser A.  The travel time in the field is reduced by 30 percent on all three assignments.  If it is one assignment scheduled tomorrow and a second one arrives, the field travel time is reduced by 50 percent. 

There are other efficiencies that are gained by this simple change, but field work and turn times are the most significant.

Un-bundle the AMC Fee for Service from the Appraisal Fee- As we noted in our review of the Coester Survey, the typical AMC takes a 30-35 percent haircut from the Appraisal Fee as it's charge for providing the advantages of their central ordering and control function.  The haircut means that the typical Appraiser or Appraiser Firm is paid 65-70 percent of the 'one off' fee in that local market for completing the assignment. 

To put that in dollar terms, the 'one off' fee for a typical 1004 residential appraisal is $350.  The AMC places the order at 30-35 percent less, or $227 to $245.  In some cases it is reported that the AMC may charge their customer $400-550 for that same 1004 appraisal.  Most appraisers and Appraiser Firms will agree that the 30-35 percent haircut is too large and results in margins that are too thin to maintain a professional business in the long run.  

The AMCs will likely respond that they do not set the AMC fee...that the market does.  That is true to an extent.  Remember my point earlier that the AMC Market for residential appraisals is an Oligopoly Market?   A study of the history of AMCs would demonstrate and conclude that by virtue of the Oligopoly status, AMCs have been able to influence appraisal product prices and have thereby created a two tier pricing market.   

One off appraisal fees in the market have held at $350 for typical 1004s for the last twenty years.  There have been significant improvements in the efficiencies Appraisers and Appraisal Firms have adopted over those twenty years.  When inflation is taken into consideration, the fee of twenty years ago in today's dollars is reduced by roughly 40 percent.  The $350 equates to $211 in today's dollars, which suggests that the appraisal fee should have been adjusted up to $583 when inflation is considered.  Yet in the typical AMC market, the appraiser or appraisal firm is paid a lower fee not higher....

AMCs provide some efficiencies for the Appraisal Firm...that's an impressive list of 'goods' above.  From Acorn's perspective I'd feel comfortable paying a 10 percent haircut for those advantages.  Any additional efficiencies or savings provided by the AMC accrue to the lender.  Un bundle the fees; let the AMC bill the lender for that additional fee for service. 

That's essentially what FHA was encouraging when they announced the adoption of a modified HVCC.  Un bundle the fees AMCs charge for their services, separate those fees from the appraisal fee.  Pay the standard fee for 'one off' appraisals in each market for the FHA appraisal ordered.  Darn positive step forward!

Since the implementation of the FHA Modified HVCC in mid February, AMC fees have begun to rise in Acorn's experience.  There are significant exceptions, but the trend is in the right direction...fostered by FHA's stand.  However, Oligopoly Markets tend to be able to resist changes that fully competitive markets adapt by the actions of the participants. 

Summary

Many AMCs currently assign appraisals to the Appraisal Firm and depend on the Firm to determine how best to handle the assignment within it's staff and time constraints.  A significant few do not.  If that change were made in those remaining few the business would improve for all parties.

Several AMCs provide 'one off' fees the Appraiser, and have for years.  Since they have remained in business and provide high quality services from the Appraisal Firms' perspective, they most likely adopted an unbundled fee structure from the beginning.  It can be done, and all parties to the transaction are better served.  If the FHA unbundled fee model were adopted for all appraisal ordering the lender and the consumer would know what the cost breakdown really is and each party would make better decisions.

Finally, let us be clear on the points made here.  Recent events have underscored the importance of the residential finance market to the overall national economy.  It is important to the health of the US economy and to the global economy that the residential finance markets function in a prudent and efficient manner. 

The Appraisal Profession provides an important service to that market as the only unbiased local market adviser/expert to each transaction.  AMCs also provide an efficient and useful service.  Lenders utilize both appraisers and AMCs to provide important information to support their loan decision process.   It is in the best interests of the lenders and the economy to ensure the long run financial health of all participants in the loan processing system.  The One Off Market for appraisal services is a fully competitive market, where the market truly sets prices.  The AMC market is an Oligopoly Market, and those AMCs who exert influence on that market should consider the consequences of their actions and adjust if necessary for the financial health of their customers and their vendors.

That's why it is important that the facts and records be clear.  If one party or another attempts to spin the facts or records in order to create a false impression of activity that does not exist, we are all damaged in the long run.  If one party provides a snapshot of data that is accurate but not representative of the full picture, we need to correct that record so that the best decisions are made...among the parties....by regulators or elected officials.

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.

Runt Rants - A Brief History of the Appraisal Profession and AMCs

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.

Last week we presented the alternate view of the AMC market compared to the Coester Survey.  That Survey presented the findings of their 'thousands' of appraisers in their panel, and ended up with an unfortunate lead paragraph; 

"After further analysis of the data from the Annual Coester Appraisal Group Vendor Survey, it seems like many of the implications made regarding the state of the mortgage industry as a whole have been debunked."

I hope Acorn's experience debunked the debunking!  Our reported experience reasonably matched the Coester Survey in each of their findings...with the exception of 'rating of the AMC experience', and more importantly, the 'fee relationship'.

The Coester Survey reported appraisers rating the AMC experience as below average.  Acorn's rating of the AMC experience as above average seems easily reconciled.  Acorn has evolved over a ten year period to serve the AMC market.  We've made changes in our business model to maximize the benefits of an AMC client base and minimize the disadvantages.  The typical appraisal business does not cater to AMCs in my experience.  That explains the different ratings results in my view.

The Coester Survey reported that appraiser fees did not vary between those received from AMCs and those from 'one off' orders in the local market.  In Acorn's experience that is hogwash, and it is contrary to the hundreds, even thousands of appraisers I've visited with over the years.  As I reported last week, only one of the eighteen AMC clients Acorn is pleased to serve fits that fee model.   The rest take a hair cut equal to an average of 32 percent of the 'one off' local fee.  Coester may be, likely is, a AMC business that matches the business model of the one client Acorn has....but that doesn't mean they represent the market! 

Policy makers, Regulators, others of influence who read the Coester Survey report would be well served to continue to read Appraisal Scoop and learn 'The Rest of the Story'....because that's exactly what we plan to present!  More important will be the comments from the readers.  They will confirm some key points, but likely differ on significant points.  The net result will be telling it like is it from the appraiser's viewpoint.

Remember my background;  bank lender, bank executive experience in a Financial Services Conglomerate which included major Residential Mortgage Origination and Servicing Divisions.  Owner of Acorn Appraisal for 25 years, ownership now shared with the next generation.  Partner in Zone Data Systems, LLC (ZDS), a new venture that aims to provide innovative appraisal services nationally.  

I don't remind you of that to beat my drum but to establish credentials for this discussion.  I do want the reader to pay attention.  I'm not smarter than you...refer to the origin of 'Runt Rants'.  But by golly I am an experienced corporate guy and an experienced entrepreneur.  I'm wise because of those experiences.

 

The History of Appraisers

Homeownership is a foundation of our country, the entire array of businesses supporting residential homes, including the lending sector, represents a bedrock of our economy.  When the residential market goes in the tank as is has in the last few years, the national, even the global economy is affected.  If we had forgotten that connection we are now reminded. 

The Appraisal Profession...it is a Profession...grew in the last century as home ownership grew.  Appraisers occupy a unique position in the economy.  They are charged with being the single unbiased participant in the sale transaction...similar to what the Realtor was in the dual agency model until recent years.  The appraiser is charged with determining value...usually market value...that the lender uses as a major support for the underwriting of the proposed loan. 

The professional appraiser of today is increasingly more educated, both formal education and appraisal theory education.  He is charged with a fiduciary responsibility to his client within the constraints of the Uniform Standards of Professional Appraisal Practice (USPAP) and he is regulated by his State.  He is also expected to be an expert in the market in which he is appraising...familiar with the nuances of local conditions, exogenous and endogenous to the property in question.  In the vast majority of the cases, he meets all those qualifications and requirements and delivers quality results.

The Licensed and Certified Appraisers may be employees of Banks, other lenders, or support industries that serve the residential home market.  May be.  But most often, (and the ones I'm going to discuss) are Independent Fee Appraisers who are also Business Owners.  We, they, own businesses that provide Professional Appraisal Services under the constraints of USPAP, State Regulators, the Appraisal Associations we may be a member of, and the laws governing agency and fiduciary responsibility to their clients.  

If you consider the entire history of the Appraisal Profession; if you consider their performance in the various business cycles; if you compare that performance to the ups and downs of the business cycle, the catastrophic failures that have occurred along the way, one can't but be impressed with their professional results.

In each crisis there have been attempts to blame appraisers for the problems that arose.  Most such attempts have fallen short of making the case in the immediate aftermath of the crisis, and in all cases have proven inaccurate in the bright light of history. 

The Appraisal Profession has done its job. 

A Briefer History of the AMC

Since the consolidation of the banking and lending business began in earnest after the S&L Crisis the Appraiser has been called upon to provide even more of the local market expertise than previously.  Before the loan officer was also local, was judged on his portfolio performance.  After consolidation the loan decision marker was distant...at a regional or national corporate office, and often was rewarded on near term performance...number of loans made or dollar growth in his assigned market.   The Appraiser became the sole unbiased local market expert.

Shortly after consolidation of the lending business the Appraisal Management Company business model began to make significant inroads into the lending profession.   Large, even bloated central bank offices had to reduce expenses. The Appraisal Department was 'out sourced' to an intermediary...the AMC.  Often the Conglomerate retained ownership of the AMC through intertwined subsidiaries. 

As an outside observer, it is easy to surmise the objectives of that out sourcing effort: reduce HQ overhead, shift the cost of the Appraisal Department to another company, yet continue to control the processes necessary for processing a loan application.  Since the other company was often part of the conglomerate, there was interest in reducing the cost of the appraisal management function in the process. 

A business model of the AMC was created at that beginning by those conglomerate financial services corporations, a business model that was copied by others, including those AMCs which were started independently.  It is a business model which is most typical today, including the pricing strategies.

The Current Environment

The AMC Business Model has dominated the bridge between the lending business and the Appraisal Profession for decades now.  Estimates I've seen suggest that 80 percent of the first and second residential mortgage appraisal demand in the USA routes through AMCs.  Other estimates are that 80 percent of that business is done by the top five AMCs.

That is a critical funnel for a critical process in our nation's economy, in the global economy!  It is important that we all understand how that business operates; its strengths and its weaknesses as they affect a cornerstone of the nation's economy.

There are many advantages to that business model, advantages to the lender, the borrower, and even to the appraiser.  There are also some disadvantages to the lender, the borrower, and to the appraiser. 

Next week we'll talk about those advantages and disadvantages, what's right and what's wrong with the AMC Business Model...touching on the lender and the borrower, but focusing on the appraiser.

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.

Runt Rants - Highly Honed Powers of Observation and Analysis Make Us Different

I don’t really know where it started. Maybe born into a family of mental giants, where the only option for the runt is to observe and listen.

Maybe it’s a small town environment, lots of experience with outdoor life learning to observe, listen, drawn conclusions.

Maybe it was the years in correspondent banking traveling to those same small towns in six states, chatting with the grocer, the barber, the gas station attendant, picking up clues, signs along the way…so that when I walked into the bank president’s office I knew more about the commerce of the town than he thought I should, and because of that we could do business, help each other.

I do know that when I came late to the appraisal profession I took all the AI courses that were available in a five year span, all they offered really.

When I began those courses I was already trained to observe, to listen, to accumulate random facts and compose a picture…a hypothesis.

The AI courses built on that base and made me better at it. All appraisers taking the good courses in appraisal theory, learned those same skill and applied what they learned in the field to develop and hone those same skills.

It’s part of what sets appraisers apart, what makes them a professional, part of the skill set that brings value to business transactions. It’s part of what we are expected to provide, why we are paid.

I’ll bet you haven’t thought about that in weeks…maybe even months!

But it happens every day, even if you don’t consciously think about it. A typical sample of that in operation occurred with me the last couple of days.

The nation is in turmoil, many markets have been in recession for a couple of years. Houston hasn’t had that problem…not until recently. Houston is an oil town. It’s much less so than in years before, but still an oil town. West Texas Light at $150 last summer created a boom in the oil patch and in the oil service business. That same West Texas Light is now in the $40-50 range, and the oil services businesses are beginning to hurt.

Houston housing markets have been in balance for the last ten years…good solid value growth in the 3-5 percent range each year. But the clouds are building and it is not just what is being reported in the newspaper…that statistic that one in three Houston houses sold in January were distress sales. That’s certainly not good, but heck! It was 24 percent distress in January 2008.

I saw clouds building as I drove to an appointment recently. Established small strip centers one after the other, all with one or two suites vacant. Three closed bank branches…now vacant.

Yet big dirt is being moved…a 50 acre commercial site to the right in vacant land that I thought would stay vacant for another couple of years. To the left a 75-100,000 square foot shopping center with a large anchor…the anchor not yet announced. That’s another one I thought would be delayed another couple of years…but there it is…tilt wall already in place!

A highway overpass gave me bird’s eye views of two large businesses on either side. To the right was an equipment rental business with a yard full of equipment. To the left was an auction house with its yard also full of equipment. Good for the auction company…bad for the companies that could no longer afford that equipment. Bad for the equipment rental business…when the lot is full the equipment is not earning revenue.

Both those yard statuses mean the unemployment rate is going to tip up in a month or two…the yards are leading indicators.

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National Association of BPO Professionals? - It was only a matter of time!

According to the NABPOP website . . . .

"NABPOP is not a BPO Company in the sense that we distribute BPO orders. NABPOP will not compete for BPO orders and is not interested in distributing, tracking, and/or submitting BPO orders. NABPOP's interest is in training BPO Professionals (experienced and new) in the proper price evaluation techniques and procedures and promoting the higher level of competence. NABPOP is an Association of BPO Professionals"

Click here for their Code of Ethics and Professionalism.

The "Right Start" Step One - Standards

AUTHOR:  Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. Click on Outside The Boxes for a collection of Patrick's articles on Appraisal Scoop!

What would make things better for housing, lenders and appraisers?  I am not talking about "quick fixes" for long-standing issues, FIRREA (Financial Institutions Reform Recovery and Enforcement Act) and USPAP (Uniform Standards of Professional Appraisal Practice) have proved such idealistic wishes only address the symptoms and do not provide the cure for what ails the appraisal industry.

For the symptoms, we could save millions by prescribing aspirin instead of taxpayer dollars. "Appraisal pressure, take two of these and call me when the scamers have left the mortgage business". "HVCC too focused on appraisers and not focused on the underlying issues, take two of these and call me when the market corrects".

The past several years proved that FIRREA and USPAP failed to accomplish what they set out to do nearly 20 years ago. While well intended, they were misguided, as they applied to only "appraisers" and "regulated institutions" and as they left loopholes that allowed the players to "sidestep the intent".   

Like the gems above from the "powers that be", the HVCC and IVPI are well intended, but pose more potential harm than good. It remains to be seen, what changes may take place before the details arrive, but from many perspectives, they are both more "aspirin" when we need a "miracle drug".

So, if we could get a "do over", starting today, what changes could be made to better protect "the public's trust"? What steps in a different direction might better assure John (and Jane) Q. Public that the "American Dream" is safeguarded by the appraisal industry, something envisioned by the authors of FIRREA and USPAP so many years ago?

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Picher, OK - Superfund Buyout Appraisers "Dogged By Complaints"

The buyout and relocation of families from the Tar Creek Superfund Site in Northeast Oklahoma is the culmination of more than 30 years of struggle for the people of Picher and Cardin. The Picher Mining Field, one of the richest lead and zinc deposits in the world, was the site of intense underground mining nearly 100 years ago. The mining took place during a time when environmental regulations were virtually non-existent.

When the mining companies ceased operations in the 1970s, the region was left with an uncertain legacy of pollution problems that impacted the health of local residents. Children were especially vulnerable to a toxic mix of heavy metals. The lead-poisoning rate among children at one time was as high as 30 percent.

A $100 million effort by the U.S. Environmental Protection Agency to remove lead from residential yards damaged many homes. The region¹s status as a Superfund site further devalued properties. A recent federal study by the U.S. Army Corps of Engineers found that large areas in Picher and Cardin could collapse at any time. That finding triggered the $50 million buyout of more than 700 properties that is now under way.

Picher's Peril: Some claim buyout undervaluing homes by Wally Kennedy of The Joplin Globe  (JOPLIN, Mo.) describes in detail many of the stories the Picher, OK families have with regards to the way their properties have been valued for the trust. 

Though trust members and a state official overseeing the buyout have repeatedly said the acceptance rate on offers is as high as 95 percent and that only a vocal minority is causing trouble, records show the independent appraisers hired by the primary contractor, Cinnabar Services of Tulsa, have been dogged by complaints from the start of the buyout process last year.

Some residents say they are accepting whatever is offered because their properties in Picher and Cardin essentially have no value because of where they live. Any offer to get out is a good offer because it is likely to be the only offer they will get.

“It’s desperation. It’s like having a gun held to your head,” said Missy Beets, who believes her house was undervalued by thousands of dollars even after a review appraiser increased the offer from $70,000 to $75,000.

ARTICLE UPDATE: 2/23/2008 - Nearly 100 people attended an organizational meeting Saturday morning in the community room at the Picher Housing Authority.

The group intends to create a database of written examples of how they felt they were treated unfairly by the appraisers and the trust. Several attending the meeting said the appraisers hired by Cinnabar spent no more than five to 10 minutes at their properties. Others said the appraisers didn’t even go into their homes and instead relied heavily on often outdated descriptions of properties on record with the county appraiser.

Runt Rants - Foreclosure Blight

I suspect most of my Runt Rants this year will be spin offs from the Sub Prime Meltdown of 2007. The crisis will reveal many weaknesses in our country, and opportunities to correct them. Today's Rant deals with an article by Michael Orey in Business week. Click here read the article.

Mr. Orey talks about those properties which have been abandoned by the owner, foreclosed upon by the lender, then left to deteriorate. He describes what certain communities are doing to address the problem. Lenders in that situation do have legal control over those properties. Lenders are and should be responsible for them.

Folks who own a residence in a residential neighborhood enter into a social contract with the other property owners when they acquire the property. The value of that property is in part created by the appearance and condition of the surrounding properties. Its a gift to the new owner bestowed upon him by the surrounding owners.

The social contract in part accepts responsibility for not doing harm to the newly acquired property which will negatively affect the rights and enjoyment created by the surrounding owners. If the contract is not fulfilled, the sum of the damage done to the neighbors far outweighs the cost the new owner avoided by exercising benign neglect.

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Runt Rants - Sub Prime and Alt-A - A Beautiful Development

Reason is rearing it's head in the Sub Prime and Alt - A crisis, and it's a beautiful thing!  Work has been progressing under the radar to get lenders and borrowers to sit down and renegotiate some bad deals.  See this article in Business Week on line. 

Now that's a smart move!  When bad deals become apparent, it's time for responsible parties to admit  the deal is not supportable and act in the best interests of both both....the market at work!

Not to toot Appraisal Scoop's horn....well, that's not true...it's time to toot Appraisal Scoop's horn!  The first column written about the Sub Prime crisis suggested this very solution for many of the potential problem loans.

This isn't the first suggestion we've made which ultimately surfaces in policy or industry initiatives.  We'll be discussing Black Lists again soon, and the insightful study done by the Mortgage Bankers Association subcommittee, which closely matches many of the suggestions Appraisal Scoop made this summer in it's Black Listing Series.

No, Appraisal Scoop is not claiming to be smart.  What we are is simple business folks experienced in the Appraisal Profession, experienced in business, filled with common sense beat into us by the real world.

What we do modestly claim is that Appraisal Scoop should be on your daily reading list.  Not for the latest headlines, (we do offer that) but for the experience and common sense that is sometimes offered here....

The old saying  "A blind squirrel occasionally finds an acorn." seems relevant.  Our modest goal is to exceed the success rate of a blind squirrel.  So far, we think Appraisal Scoop is succeeding!  We hope our readers agree!

The author 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]

I have the right to remain silent. Anything I say will be misquoted and used against me

Runt's Rants - The World Is Flat! - Appraisers in a changing competitive environment

According to Pulitzer Prize winner and The New York Times columnist Thomas Friedman, the technology you use every day -- from computers to cell phones to Internet browsers -- has changed not only how you work, but also how businesses compete. It has certainly removed barriers to trade -- making it easier to sell digital cameras in India -- but it has also broken down the geographic and cultural barriers that previously kept countries like China and India from competing on the same level with western business. -The World Is Flat: A Brief History of the Twenty-first Century.

Last week Ken Verrett introduced the concept of brand and generic products in the market place.  This week, Ken discusses how the lending industry has taken advantage of market opportunities to modify their businesses to better compete in today's Flat World.

Brand products are created as a result of a marketing campaign to distinguish the brand from their competitors. The perception must be created in the consumer's mind that there is a difference between Cambell's soup and the others on the shelf. Once that perception is achieved in the market, the higher price is justified by that perceived difference.

Generic products make no attempt to create such a perception. It is what it is. We can't conclude that generic is a poor or unacceptable product...there are certain standards that must be met for the product to be offered and accepted in the market place. But generic products didn't have the investment in marketing necessary to differentiate that product from the others on the shelf, so no price premium can be earned.

Part of the marketing campaign for the brand product is to suggest that there is such a difference by inference if nothing else. It's a perfectly legitimate marketing tactic as long as it is done by continuing to reinforce the positive attributes of the brand. It is not legitimate to accomplish the differentiation by attacking the generic product. That brings law suits.

We also discussed the evolution in the finance industry over the last few decades, how the changes shaped by technology created opportunities to change the fundamental way those institutions conducted business. The lending industry has taken advantage of those opportunities to modify their businesses to better compete in today's Flat World. Local and regional financial institutions sold out to money center conglomerates on the left and right coasts. Loans were modified to be grouped as inventory in packages (CMO's) to be sold in the secondary market.

The lending industry became more like the local retailer, with profits made from inventory turns, not as much from net interest margins as previously. The loans, now inventory items, had become commoditized; a generic product had been created. That is a truly fundamental change in the lending industry.

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