Anyone who has worked in the real estate or mortgage loan origination industries can confirm that there has been a lot of controversy in recent years about appraisal management companies (AMCs). AMCs manage a network of third-party appraisers who work independently or by contract. Ideally, AMCs serve as an intermediary between lenders and appraisers to facilitate the ordering, tracking, quality control, and delivery of appraisal reports.
AMCs have existed since the late 1960s, when banks and other lending institutions were expanding their geographic coverage, creating a need to organize and manage larger appraiser panels. AMCs became increasingly common during the 1990s as the mortgage industry continued to trend toward increasingly larger institutions, but they didn’t predominate the appraisal industry until after the last housing crisis. And as more and more appraisals were ordered from AMCs rather than directly from appraisers, conflicts increased.
During the housing bubble, there were many complaints of appraisers being pressured to adjust their appraisals to hit specific, higher values. In the second half of 2006, October Research, LLC, undertook a comprehensive survey of appraisal business practices. Their results indicated that 90% of appraisers felt pressure to restate, adjust, or change property valuations during that period. To reduce such problems in the mortgage industry, New York Attorney General Andrew Cuomo, the Federal Housing Finance Agency (FHFA), and Fannie Mae and Freddie Mac developed a set of appraisal rules called the Home Valuation Code of Conduct (HVCC).
The HVCC became effective on May 1, 2009 and, at its core, assured appraiser independence from pressure exerted by any party with an interest in the outcome of a loan transaction. Restrictions were placed on communications between appraisers and third parties such as mortgage brokers and real estate agents, and lenders had to obtain appraisals in a way that would prevent them from influencing the appraiser. The same department could not be involved in both loan origination and appraisal acquisition. To meet this appraiser independence requirement while minimizing liability, most lenders chose to work with AMCs.
While the HVCC had significant effects on the appraisal and loan origination industry, it didn’t last long; it was replaced as part of the requirements of the far more extensive Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank Act called for the sunset of HVCC on October 21, 2010 and required the Federal Reserve Board amend the appraisal independence rules in the Truth in Lending Act (TILA). The Federal Reserve Board issued an interim final rule effective April 1, 2011 to ensure appraiser independence and require that appraisers receive “customary and reasonable payments for their services.” Although no longer in force, the HVCC substantially influenced the appraiser independence rules now in effect; with many lenders using AMCs, they proliferated.
Many appraisers complain that AMCs take too much of the appraisal fee without actually improving appraisal quality. We at Greenfield have not seen a systematic study of AMCs where profit margins have been estimated; that seems to be a gap in the literature. However, members of the appraisal management industry have estimated that an AMC needs at least $150 to $200 per unit to adequately manage and review the appraisal process and have some profit left over. That would be a substantial increase in the average appraisal fee for most markets when many AMCs are trying to keep costs low to compete for business. If the AMC is operating under a fee-split business model, this typically translates into paying appraisers a smaller portion of the total appraisal fee instead of raising the cost for the buyer or operating at reduced profit or perhaps even a loss. The other possibility is what is referred to as the cost-plus model, where a standard customary and reasonable appraiser fee is established for each market in which the AMC operates and the predetermined AMC fee is added to the appraiser’s fee to arrive at the total appraisal fee charged to the client.
However, appraisers aren’t the only ones who feel like they have suffered in this controversy. Faced with denial of its license to operate an AMC in the state of Virginia, on August 3, 2015, Coester VMS filed a lawsuit against the Virginia Real Estate Appraiser Board in Virginia Eastern District Court alleging that the Board is engaged in “a conspiracy to restrain and monopolize trade” and has violated federal antitrust laws. Virginia’s AMC Regulations empower the Board to decide whether to issue a license to an AMC that has been subject to any form of adverse disciplinary action. Brian Coester and Coester VMS have been subject to consent orders and settlement agreements for alleged violations of state laws in five other states. Intriguingly, Coester claimed that because his AMC pays appraisers less than non-AMCs, removing Coester VMS from the market would harm the public by increasing the cost of buying a home.
The recently released October 2015 Voice of the Appraiser from October Research, LLC provides some insight regarding how both appraisers and lenders feel about working with AMCs. Appraisers reported that the most common appraisal fee they received was $300 to $400 (45.8% of responding appraisers), while 44.8% of responding appraisers typically received $400 or more. Despite reporting higher appraiser fees than in past years, many appraisers reported that they are not being paid enough. Just 9.4% of appraisers felt that the fees they were paid were customary and reasonable, and 67.5% felt that low fees were a major concern. Much of that is likely because appraisals are generally taking longer to complete due to regulatory changes and increased oversight. Appraisers claim that the standard turnaround time has grown to four or more days.
Lenders backed up appraisers’ views of longer turnaround times; 82% said that time has not gotten faster, and AMCs tend to slow the process. Moreover, with the industry’s increased regulatory demands, 76% of responding lenders said they have increased scrutiny or vetting on their appraisal vendors. The majority of lenders also said that fees have gone up; 57.1% of responding lenders said typical appraisal fees for lenders ranged between $400 and $500.
Based on the survey responses collected by October Research, there appears to be a consensus that many appraisers are not adequately compensated. Almost 90% of lenders said that they had not yet moved to a cost-plus model; however, lenders thought that AMC usage would be better supported with a cost-plus model that included a separate management fee that was disclosed. The cost-plus model encourages AMCs to select the most qualified appraisers rather than the cheapest, and increased transparency tends to reduce conflicts.
Similarly, Jeff Schurman and Rick Grant wrote an interesting paper in 2012 claiming that most complaints against AMCs could be resolved by changing the business model to pay appraisers their full fee. The authors suggest that AMCs have falsely assumed that they must keep their appraisal fees low, competing on price. In contrast, they claim that large lenders would be happy to pay more for better service and higher-quality appraisals, and everyone in the mortgage loan origination industry would be better off.
In July, the Georgia Real Estate Commission & Appraisers Board released the results of a study it funded of customary and reasonable fees for residential appraisal services that non-AMC clients paid to appraisers in Georgia in 2014. The Board subsequently adopted a rule effective on September 20 that requires AMCs to pay appraisers fees that are customary and reasonable for comparable residential property appraisals in the relevant market area. In addition, payment obligations must be met within 30 days of delivery of the appraisal. If rules like this are adequately enforced, it may help resolve some of the conflict between appraisers and AMCs, but we suspect other controversies will remain.
The next interesting question is how high of an appraisal fee will the real estate market bear. Do you have any ideas on this? Or do you have experience working with or for an AMC? Do you think they have helped or hurt homebuyers trying to obtain a loan? Share your thoughts in the comments below.