AMCs: the whole truth and nothing but the truth: the lending industry needs to think through the factors that have reshaped the appraisal business in recent years.
This, of course, fails miserably due to the "race-to-the-bottom" mentality regarding fees, and as we all know, one usually gets what one pays for.
I'm not saying categorically that low fees always equal poor quality and poor service. I am pointing out, however, that if an industry has a going rate for an imaginary service at $300 and Mobster-Ring finds several individuals to agree to do a similar service for $150 or less, the final outcome may be suspect.
I am also not saying the individuals agreeing to a compressed pricing schedule are bad or deliver poor quality. They may have built a workflow that allows for much greater efficiencies and so can afford to compete at this level. They may have a business model that cost-averages the low fees they accept with higher fees from other clients, all while controlling costs.
Some appraisers simply accept the lower fees out of fear of losing volume. I will let you draw your own conclusion about the general quality that results from a race-to-the-bottom fee model, but I will concede that some good quality yet more poor quality is the typical result.
AMCs have also emerged as part of the trend of bundled-service providers. These bundled-service providers offer title, settlement services, flood insurance, closing services, credit reports, and many other products and services lenders have outsourced. These bundlers are similar to AMCs, but with many other bells and whistles. Again, the bundled service providers are formed with good intentions--a "one-stop" shop for all of the lender's needs along with the promise of lower fees for some of the services due to offsetting product lines.
It is an all too familiar conversation when competing against these bundlers. The lender admits it is getting its appraisals done at below-market rates because it also sends title work to the same company. Good appraisal companies can't compete with this pricing model, because they only do the appraisal portion. They do not have other high-margin products to allow for some services to become loss leaders. They focus on one very important part of the real estate mortgage market--accurate market value. One potential downside, in my view, of these bundled service providers: Too much diversification can lead to a lack of focus on key products.
Now let's talk about oligopolies. An oligopoly is a structure in which a market or industry is dominated by a small number of sellers (oligopolists). Today, the top five lenders control a very large portion of the mortgage market. Where and how these oligopolists obtain their appraisal services will determine pricing for the entire national appraisal market. Based on the very high volume they can generate, and the bidding wars that ensue to win work from them, fees get compressed to below-average levels for appraisal services rendered.
So, let's recap.
In-house appraisal or vendor management departments: Costing the lender way more time and money than it is worth, not to mention the fact that, if not set up properly, the loan production staff gets to know the appraisal staff--and you can use your imagination.
Lender-owned VMCs: Price compression based on the lee-squeeze model.
AMCs: Great concept if run on proper principles, but bidding on RFPs and the low-bidder-wins concept that most lenders adopt will result in price compression.
Bundled service providers: Offering many high-margin products, they can afford to offer appraisal products at little to no margin to gain other business from lenders. This also results in appraisal price compression.
Oligopolies: Top-five lenders choosing who gets an extremely large share of volume, mostly based on volume-based pricing, also equals price compression for appraisal services.
Now, let's look at the remaining small percentage of the appraisal market that can get done without all of the price compression. The expectation is that at least these appraisal requests can get quoted at appropriate levels. However, the reality is the majority of the market has already set fee levels that suffer some kind of price compression, and that has the effect of watering down these quotes in many cases.
Today the term AMC, especially for appraisers, can have a negative stigma attached to it for several reasons:
* Price compression of the total appraisal fee for all of the aforementioned reasons.
* Paying a very low portion of the total fee to the appraiser to keep margins high, creating a number of vocal appraisers that lump all AMCs in the "evil empire" category.
* Some AMCs act simply as a middleman--doing very little other than receiving an order, assigning and delivering it, yet they take a large portion of the fee.
* Some AMCs have no "real" quality control (QC) department. They use automated tools and/or low-level box checkers to look at files, and have potentially no QC function at all.
These factors are a source of concern for the appraisers that actually perform the orders; in most cases, rightfully so. The price compression along with the business models that proliferate in the appraisal landscape do not help appraisers as they try to hold their fees level with inflation.
Appraisal pricing models
Let's look at some of the ways appraisers are paid for services. The first example is a percentage-based fee, where the appraiser agrees to take a percentage of the total fee, which can be anywhere from 40 percent to 80 percent. The second example is a flat fee, where the appraiser is offered the assignment at a flat fee, which he or she can accept or reject. The third example is cost-plus, where the AMC gets a fee quote from the appraiser (making sure it's in line with typically quoted fees for the area) and then adds a fee onto the appraiser fee for its services.
The fourth example is when the appraiser receives the work directly from the lender, and keeps the entire fee. This fourth model has become less popular based on the cost and time for a lender to manage the process, as well as the regulation and guidance issued to insulate the appraisal function from originators.
Many of the complaints from appraisers stem from the percentage and flat-fee payment models. The AMC may offer a low percentage or low flat fee off of an already price-compressed fee with the promise of higher volume to the appraiser.
The open market sets fees paid to appraisers. It has been that way forever in the appraisal industry. In my view, appraisers need to relearn how to say "no" to unacceptable fees, and then the price correction can begin to take shape. The Dodd-Frank Wall Street Reform and Consumer Protection Act actually includes language about appraisers receiving "customary and reasonable fees," which may create issues for AMCs that pay considerably lower fees to appraisers with the promise of volume. The AMCs that adopt the cost-plus model may fare better, and it looks like the best option for both the appraiser and the AMC. As previously stated, appraisal fees certainly have not kept up with inflation, based on my experience.
A good AMC (I know what you may be thinking, but yes--there are some good ones) does many things for the lender. For example, it offers:
* Seamless systems integration for sending and receiving orders;
* An audit-proof firewall to protect against pressure on appraisers to arrive at a predetermined value (appraiser independence);
* All products and services regarding valuation;
* A 24/7/365 order management system (OMS) with access to up-to-the-minute status for each file;
* An OMS with built-in (and customizable) automated reporting for turn times, invoicing, statements, appraiser grades, status commenting, document retrieval and archiving, percentage of files requiring additional information (and what type of information) and efficiency tracking;
* An appraiser-verification process allowing for background checks with automated monitoring,, licensing verification, errors-and-omission verification, and controls around pre-existing "do not use" lists;
* A high-end QC department that grades every single appraisal based on an objective scoring system;
* An appraiser-ranking matrix based on quality, customer service and turnaround times to ensure the best appraisers get more orders;
* A system with built-in distance parameters from appraiser to property to better ensure geographic competence;
* Software connections to the majority of third-party providers;
* Longevity, experience and knowledge in the industry, with a reputation for accuracy;
* Adherence to all national, state and local regulations and published guidance; and
* The ability to easily absorb a lender's fee panel for the AMC to properly manage and lower lender risk.
Being selective about appraisal business
RFPs continue to come from lenders asking for the lowest bidder but adding still more requirements. I never thought it possible, but with more than 25 years in the appraisal industry, our company has actually opted out of the bidding wars for some potential high-volume clients.
Our firm has seen RFPs with requirements and SLAs that no one in the industry could possibly meet. Yet, I know some of our competition has responded. In these instances, we choose to send a one-page letter in response pointing out that if anyone states they can meet the SLAs of this agreement, they are misleading you (the lender) and we will not be bidding on this contract.
RFPs need to start focusing on what has always mattered--the accuracy of the market value when a report is completed. The mortgage industry has drifted so far away from this, I am not surprised that many appraisers have given up.
I started in this business in 1983, when a real estate appraiser was ranked as a highly honored profession, and that was one of the reasons I entered the field. Today, appraisers are ranked somewhere near used-car salesmen (I apologize to used-car salesmen).
The system has allowed for regulations to be overlooked and price compression to drive fees from too many sources. It is time for the industry to choose appraisers, appraisal companies and AMCs that actually deliver accuracy and value to their clients.
The low-bidder cycle is likely not the answer. You would think the industry would have learned an important lesson: An appraisal should not be treated as a commodity.
What has changed?
When did accuracy become less important?
One of the reasons, in my mind, is the mortgage lending industry's embrace of credit scoring. Credit scores arrived and mortgage lenders started to lean more toward a credit-based decision and it became less of a collateral decision.
New appraisal products were created in the lender's need for something less than a full appraisal. Drive-by appraisals, desktop valuations, broker price opinions (BPOs) and even automated valuation models (AVMs) were used to replace the full appraisal form. Although these products have saved the lender time and money, the overall result needs to be examined.
All of these valuation tools have a place and purpose in the lending arena. In every case, the industry I needs to ask what is the level of risk in a transaction and then choose the appropriate tool.
We are faced with several more years of turbulent real estate markets, increasing foreclosures, along with a growing inventory of real estate-owned (RED) properties held by lenders and government-sponsored enterprises (GSEs).
Lenders find it difficult to adopt new policies and procedures--and that applies to appraisal policies as well. But necessity is the mother of invention. Lenders, as well as the entire industry, need to adapt now to the changed market conditions.
Recent times have brought new laws and requirements such as the Home Valuation Code of Conduct (HVCC) and the Dodd-Frank Act, which reiterate the importance of appraisal independence and accuracy. Yet, most of the rulemaking and guidance around appraisal independence and accuracy had already been addressed in lending regulations from earlier periods. Years of a booming mortgage market and a real estate market with ever-increasing property values lessened the concern over those regulations. Pressure from loan production staff to reach values was never higher, however, than during the most recent boom.
Regulations have given AMCs a more important role in the renewed search for appraisal accuracy.
What should we be asking?
RFPs need to ask different questions of appraisers before getting to the topic of fees. Some of the more important questions are:
* When was the company incorporated?
* Who are the owners and what are their backgrounds/qualifications? (If owned by another corporation, give details.)
* How many claims have been filed on your errorsand-omissions policy? (When/why/outcome?)
* How many times has your company been in a legal dispute? (When/why/outcome?)
* How many times has your company been removed from a client's list? (When/why?)
* What are your QC policies and procedures? (Submit your QC manual.)
* What percentage of your files are returned for additional information?
* What is your total state coverage and how long have you been appraising in these states? (Careful, as AMCs have been springing up like weeds over the past year ... gee, I wonder why?).
If the lender can get comfortable with the answers from this short list of questions, maybe then it should ask for the fee schedule.
AMCs are one of the keys to solving the problems facing the industry today. Good AMCs provide a valuable service to lenders while compensating appraisers fairly for the work they complete.
Many companies have popped up calling themselves AMCs because of new regulations, and many old AMCs have business models that may suffer in this new environment. Appraisers will ultimately decide which AMCs they will work with. Lenders, too, will eventually take a different look at how they chose an AMC.
In the end, choosing a good AMC is a win/win for both the lender and the appraiser. The appraiser gets a steady stream of work without the cost of marketing, QC review, billing, collections, OMSes, system connectivity and more. This allows appraisers to focus on completing the report without the cost of the items the AMC will be completing, and appraisers can concentrate on delivering an accurate report.
So having debated these pros and cons it comes down to a question of how would you categorize the industry fixture we know today as AMCs. Good, bad or ugly? You make the call.
In my opinion, most of the AMCs lack a supportable business model in the current real estate climate. That leaves only a handful of quality AMCs to provide best-of-class appraisal management services in this ever-changing market.
Choosing the right AMC has become a very difficult process. Proper due diligence and risk analysis during the selection process will result in higher quality accuracy and integrity.
James A. Kirchmeyer is chief executive officer of Kirchmeyer & Associates Inc. and Real Info Inc., in Buffalo, New York. He can be reached at email@example.com.
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|Title Annotation:||Industry Trends|
|Comment:||AMCs: the whole truth and nothing but the truth: the lending industry needs to think through the factors that have reshaped the appraisal business in recent years.(Industry Trends)|
|Author:||Kirchmeyer, James A.|
|Date:||Feb 1, 2011|
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