The AMC model and its impact on the appraisal industry appears to be changing, as some banks announce plans to bring appraisal ordering back in-house.
In essence, appraisal management companies act as the middle person, a position between the lender who is making the loan and the appraiser who is developing a value opinion for the lender, according to Appraisal Institute President Jim Amorin, MAI, SRA, AI-GRS.
“They kind of act as the folks handling the administrative and management functions for the lender. And it’s pretty common practice, especially in the residential world today, for an AMC to be involved in a transaction,” Amorin said.
There are laws that govern AMCs. In August 2017, 45 states had some type of AMC oversight laws in place. Hawaii, Maine, New Jersey, Rhode Island and South Carolina recently passed AMC-related laws. The only states remaining without AMC oversight laws in place are Alaska, Massachusetts, Ohio, New York and Wisconsin.
“But I suspect those are coming; they just haven’t been enacted yet,” Amorin said.
The primary goal of AMC legislation is to protect the consumer. And there’s a reason for that, Amorin said.
“Back in the late 2000s, there was a lot of pressure being placed upon appraisers,” he said. “If they didn’t hit the number that was needed to make the loan, they were being blackballed. The idea behind (the laws) is to make sure that appraisers can operate independently.”
Appraisers, however, look at the regulations and AMCs as a mixed bag, according to Amorin.
The first laws that were enacted didn’t really require the use of AMCs but required that a firewall be built to protect appraiser independence. That was when the Home Valuation Code of Conduct was enacted in 2008. Some elements of the initial laws also were part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010.
The good intentions might have morphed into a system that encourages greed.
“It’s hard to make a blanket statement, but I would venture to say that most appraisers believe that the AMCs that have come into the marketplace are earning their fees off the backs of the appraisers,” Amorin said. “And the appraisal management company often is looking for the cheapest and fastest person to do it, versus the person who may be the most qualified or the most competent.”
Prior to its use of an AMC, a lender would have a panel of appraisers that were approved by lenders to do the appraisal. If the lender collected $500, for example, from a consumer to do an appraisal on a home the consumer was purchasing, that full $500 was paid to the appraiser for the appraisal assignment, according to Amorin.
“The appraisal management company often is looking for the cheapest and fastest person to do it, versus the person who may be the most qualified or the most competent.”
With most of today’s AMC models, according to Amorin, the lender collects the $500 fee from the consumer and hands it over to the AMC, which then tries to find an appraiser to do the assignment for less than $500.
“What we’re finding is that most appraisers are seeing their fees [reduced to] about half of what they were prior to the advent of this,” Amorin said. “Those people who are qualified and competent, who had a big client base, tend to shy away from doing work with AMCs because it just doesn’t pay as well as the other types of work. From a consumer’s standpoint, we believe consumers are probably not getting the best valuations they could get because it’s usually the least competent, the least qualified people who are willing to work for half the fee.”
But things could be changing, according to Amorin.
“Wells Fargo had been using an appraisal management company to manage the appraisal process and recently stopped doing that,” he said. “From what I understand, Wells Fargo is taking those duties back in-house. A lot of the Appraisal Institute’s nearly 19,000 members are saying that this is a trend that they’re starting to see — smaller banks and even some of the larger banks are starting to turn away from the AMC model.”
What it all means
Does this mean the end of AMCs? Probably not, Amorin said.
“What I think is happening is that some of the lenders are starting to recognize that they’re not getting the highest quality product, even though they’re effectively paying the same fees,” Amorin said.
Amorin says that he predicts a couple of things might happen. One is that lenders will start handling the appraisal function in-house, dealing with appraisers directly, as they did in the past. Or, an even more popular option among appraisers, according to Amorin, is that AMC models will focus more on finding the most qualified and competent appraisers. This has already started to occur, Amorin said, because getting a good appraiser to start with makes the mortgage lending process faster.
“I think the lenders are going to pay those types of appraisal companies a fee to manage the process; the appraiser will get paid a fair fee; and, ultimately, loans will be closed quicker because when you have the least qualified, lesser competent people doing the work, it takes a long time to get an appraisal approved,” he said.
There’s increasing pressure to quicken the appraisal process, especially in residential mortgage lending, according to Garth Graham, senior partner at Stratmor Group, a premier consulting firm, Greenwood Village, Colo., that offers performance and financial benchmarking for mortgage lenders.
“We absolutely see that the turn times associated with appraisals is a critical issue for lenders to address if they want to be able to compete on turn time and serving purchase borrowers,” Graham said. “Lenders are attacking the digital mortgage by getting faster and better at collecting income and asset documents, things like that. The last remaining part is really the appraisal because it involves multiple parties. On a purchase, the listing agent has to be there to let the appraiser in the house. Third party appraisals, by definition, are hard to control from a service level.”
Graham said that what often happens is the appraisal problem is exacerbated by steps in the process that aren’t well-coordinated in advance of the appraisal.
“Whatever you do with appraisals — whether you manage your own panels, if you use an AMC or use multiple AMCs — you need to tightly integrate those steps and try to do them as fast as possible and order the appraisal as early as you can,” Graham said.
The changes that seem to be on the horizon are good for appraisers and ultimately consumers, who stand to get a better product for their money, Amorin said.
Appraisers can keep abreast of the changes by going to the AppraisalInstitute.org and signing up for the weekly industry e-newsletter, Appraiser News Online, as well as the quarterly Washington Report and State News e-newsletter — which is about legislation impacting the appraisal industry at the federal and state levels — and Residential Update, a monthly e-newsletter focused on residential valuation news.