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AMCs will make you Go Bankrupt

It’s as easy as 1, 2, 3!!

The evolving market that residential appraisal firms work within is anything but business as usual as of late. It seems that there is some rhyme and reason to the big appraisal management (AMCs) firms that operate across the country in how they are setting their pricing. It has almost always been this way, but with times getting leaner and leaner, appraisers are really starting to take notice.

For everyone to be on the same page, AMCs are companies that act as a third party company between the lender and the appraiser being used to value the property being appraised. For the sake of fairness here is what Title/Appraisal Vendor Management Association (TAVMA) defines an AMC to be:

“ An appraisal management company, therefore, is an outsourcing solution that is paid by a lender-client to

act on the lender/client’s behalf to engage real estate appraisers and to perform the administrative functions

involved in the appraisal ordering, tracking, and delivery process. The AMC recruits, qualifies, verifies

licensure, and negotiates fees and service level expectations with a network of third-party appraisers,

administrative duties like order entry and assignment, tracking and statusing, pre-delivery quality control,

and preliminary and hard copy report delivery. It also involves ongoing quality control, accounts payable and

receivable, market value dispute resolution, warranty administration, and record retention”.

Now, that is a very pro-AMC definition and for the most part correct, but there are some things to look at a little closer.

US & Them

There are basically two camps of appraisers that work within the residential appraisal market that deal with lenders. There is the side that gets the majority of their work from lenders who use AMCs, and there are those that don’t. More often than not, the appraisers who depend on AMC work predominantly receive much lower fees for doing the work. I have seen this in my area where AMCs will contact me to do a report that is traditionally $350 for, the lowest so far, $190. That is such a low rate that normal appraisers often scratch their heads and wonder how someone can competently do this kind of work.

Usually the ones that do work with AMCs depend on volume to make money. When the boom market was running high, no one bothered to really take issue with it. I know that I had been solicited to do some of that work, but declined it having more work than I could do at the time. Now, I am on the verge of doing what many of you are doing or considering yourselves: working at reduced fees, or looking for other ways to supplement income. That is a sad reality considering more than a few of us are better at our jobs than a good majority of our peers. Even worse, we are the ones that want to do this as a long term career, not just make money doing something.

Many appraisers are afraid to have this conversation as it may be considered a violation under the Federal Trade Commission’s Anti-Trust Laws. I would agree if this article was being sent directly to all my local competitors, but this is also an issue of public trust and borrower rights. It is also a national problem that can, and has, negatively affected the economy. We will get to that in a little bit.

Are Borrower’s Benefitting?

Looking at the cost for consumers to borrower, one can not overlook the closing costs and upfront costs that every borrower pays. Normally, at least where I live, borrowers are asked to pay the appraisal fee and credit application fee up front. That way the lender’s direct cost to consider doing business with that borrower is taken care of.

AMCs get hired by lenders, and in some cases own part of or all of the interest in the AMC. Most of them look for appraisers that are minimally qualified and that will work for less than the typical rate for their locale. The fee being paid is not done so to reduce the cost to the borrower, but allow the AMC to add their fee into the process and in return the AMC makes money directly from the appraiser’s fee difference. Since the lender “hires” the AMC to take care of the appraisal component, they disclose whatever the fee is being paid to the AMC as the appraisal fee on the settlement expense. From my understanding after talking with several loan officers at various lenders who use AMCs, this is done across the board on all loans, with the exception of VA loans.

Competitive Pricing versus Competent Appraisers

Competition and pricing amongst appraisers is very well a business management component, and normally this would not raise any eyebrows. The problem is that no one on the lender’s side is asking about quality. The licensing that went into effect in the early nineties for appraisers was a needed, if mishandled affair. The Savings and Loan debacle spurred the creation of the Appraisal Foundation and the Appraisal Standards Board. From this minimum requirements were established, which were left in place until the requirements were recently increased in January of 2008.

Prior to the licensing requirements, the only ways to determine who was serious about appraising and who was just appraising as a job was the education the individual appraiser took, and continued to take over the course of their careers. Designated appraisers from the Society and the Institute were considered the best among their peers, and rightfully so as the education and experience needed to become designated was much more intense than what would constitute licensing requirements.

Even still, lenders would choose appraisers based on personal relationships that outweighed common sense. In some of these cases appraisers were selected to support the amount of the transaction rather than appraise the property. If you fast forward 15 years or so, you can look at basically the same problem reoccurring all over again. The minimum requirements in most states for appraisers to become licensed were simple enough that specialty schools could entice anyone interested in learning a new career to pay their fees for classes and text, and within 90 hours of beginning they were ready to sit for a state license. There was of course the minimum experience hours required, but when the market took off a few years ago, folks had no trouble earning the hours. Many people doing so in less than a year. Re-read that last sentence, someone could go from selling used cars to appraising lender collateral within a year’s time.

The local appraisal school where I live actually had an instructor that had been sanctioned by the board twice, yet that appraiser was still instructing. While I attended this school, I ended up supplementing my theory with appraisal Institute education, and by making friends with other AI members. Unfortunately, many of these folks went to work with various firms. Most of the time they were hired due to relationships with lenders or within real estate, helping their supervisor bring in clients they would not normally have had otherwise.

These are the same appraisers that are willingly taking AMC work for the majority of their assignments. AMCs do not look at background beyond seeing that the appraiser is licensed and has E&O insurance. If they did, designated appraisers and non-designated appraisers that are serious and career minded appraisers would be the first to be considered. AMCs, like the majority of the lenders themselves, concentrate only on the profit they make.

I understand that lenders want to use these companies to allow someone to stand between the lender and the appraiser. In theory it helps eliminate value pressure from the loan officer to the appraiser. It also allows for better management of the appraisal order, as most loan officers have a million other things to do besides track down the appraiser to get status updates.

If the system could be allowed to work on its own merit and ideals I would be the first to say leave it in place. The human condition in relationship to greed and wealth does not allow for most people to ethically go about their jobs as they should. That is why the concept of no regulation is such a bad idea. These AMCs for the most part prevent lender pressure to the appraiser, but that pressure is replaced with the attrition that comes about from AMCs choosing appraisers.

The same greed that affects the old way of doing things, is now being allowed to influence how appraisers are selected for work under the AMCs. Now instead of appraisers being black listed for doing honest work, they are being told to work for slave wages, or they will be replaced by lesser qualified appraisers. How this can benefit the economy in general is certainly not supported by what I am seeing, and many of you have had this same conversation with me.

When I review work it is less than acceptable many times. The system is broken, and as long as lenders are left to select AMCs who force appraisers into hardship over fees, we will end up with what we have now, a failing economy. There can be no hope for anything else if we continue to not learn from our own mistakes.

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I will have the second part of this article up in a couple of days. I look forward to your questions and comments.

FM & Associates is Ahead of the Curve!!

Let's face it, real estate markets are difficult in the best of times to read and understand. We have begun to include some charts that we make directly from data available to us from the MLS.

These charts help paint a picture that is accurate. Woody Fincham, our President, has not only started using this cutting end appraisal methodology, but helped write the program and the book on it.

Please stop by our site to read about it.

http://www.fmava.com/MCA