“Hey Rich, I need a $500,000 appraisal to make this refi work; there’s an extra $300 for you if you can push the value to $500,000…”
That was the entire schtick of a loan officer I knew back in the day (prior to the 2008 meltdown). He was friends with an appraiser who would push values (for a fee), so the loan officer cultivated deals where value was an issue – and then charged borrowers extra (a lot extra) for his “ability” (aka fraud) to get appraisals to come in at the necessary value.
Even though that appraiser lost his license long before the 2008 meltdown, the above actions are an example of why Appraisal Management Companies (AMCs) appeared after the 2008 meltdown – as a result of Dodd-Frank legislation and other regulations.
I have blogged about AMCs many times, e.g. Appraisal Management Companies Explained, but am hitting it again briefly because so many borrowers and even agents confuse appraisers with AMCs.
EVERY LENDER ORDERS APPRAISALS THROUGH AN AMC
Every mortgage lender is required by law to order every appraisal through an AMC of some sort. AMCs maintain large pools of licensed appraisers who are randomly chosen to appraise properties when appraisal orders are received by the AMC. More importantly, no loan officer is ever allowed to speak with an appraiser in regard to a particular transaction.
Prior to the 2008 mortgage meltdown, loan officers could order appraisals themselves and speak directly with appraisers. As a result, loan officers would often pressure appraisers to appraise properties for specific values. Many appraisers felt pressure to comply because they did not want to lose future business or, worse, they got paid more to push values higher. This dynamic resulted in a lot of fraud that greatly exacerbated the mortgage crisis.
As a result, Home Valuation Code of Conduct (HVCC) rules were established to eliminate the potential for fraud – but the rules created other issues such as higher fees and a lack of accountability for negligent appraisals.
Large, nationwide AMCs were created soon after HVCC came about and all of the large banks and mortgage lenders started to order their appraisals through the AMCs.
Initially, the AMCs were a mess because they would hire any appraiser, irrespective of talent; they gave orders to appraisers who had no experience in various areas; and they simply refused to amend blatantly negligent appraisals … largely because they didn’t have to (because they had a captured market because of the regulations).
Things finally started to improve several years ago, as the AMC arena itself grew more competitive and accountable, but I am still not a fan of AMCs because they collect large fees from $150 to $500, depending on the AMC and the type of appraisal. These AMC fees both raise the cost of appraisals and take fees from the appraisers who are actually doing the work.
To be fair, the AMCs need the fees to hire staff to aggregate orders, to market for business, to manage their pools of appraisers, and to do “quality control” checks for every appraisal.
AMCS DO NOT EMPLOY APPRAISERS
AMCs do not employ appraisers but instead contract with them once appraisers are added to their pool (usually by request).
Hence, appraisers are still independent contractors who are randomly assigned orders by the AMC (and then paid only for the appraisals they complete).
So, when lenders have appraisal issues, sometimes it is because of the appraiser (value issues, missed comps, errant inspection data) and sometimes it is because of the AMC (delivery delays; communication issues) – but the two (AMCs and Appraisers) are NOT the same.
LENDERS MOVING AWAY FROM AMC MODEL
Many lenders are trying to move away from the pure AMC model in order to lower fees, reduce delays and/or exact more accountability.
They are doing so by either setting up internal AMCs, run by the lender, but still strictly following the rules, or by setting up “hybrid” AMCs that are smaller AMCs that work exclusively with a particular lender, allowing for lower fees, control over the appraiser panel and just better service in general.
JVM has experimented with both approaches with success – but our main goal is to always be able to hand-pick the appraisers who are in our AMC’s appraisal pool – to ensure quality work as much as possible.
When we do get a low-quality or negligent appraisal, we follow the appropriate steps to remove the appraiser from the pool.
SUBJECTIVE VS OBJECTIVE APPRAISERS
In response to my Monday blog (WSJ: “Low Appraisals Upend Home Sales”), a very seasoned agent/broker sent me the below comment in response to my comments about appraisers being largely “objective.” (I love getting feedback like this btw).
“Sorry, but you can’t convince me it’s not more subjective than not. I got two appraisals on my house within a few months of each other this year… and they were $600k apart. The first one came in at $1,350,000…, the second at $1,950,000…. Absolutely nothing had changed with the house.”
Anyway, he is right that some appraisals seem largely subjective and we too have had many experiences similar to his.
But, I would estimate that at least 95% of our appraisals are largely objective and very well-prepared in light of the data and guideline constraints appraisers face.
