Lately, appraisal management companies (AMCs) have been in the news. In fact, few people had heard of AMCs until recently. Perhaps that is because they are business-to-business entities, usually not catering to the general public. AMCs, by definition, are vendor management companies acting on behalf of appraisal users. AMCs are becoming more popular among lenders, and not everyone is pleased. Why would anyone care whether a bank outsources its appraisals? Furthermore, why would a bank want to farm out its appraisals?
Lenders outsource these services for three reasons. First, it helps reduce fraud between the lender’s salespeople and the appraiser, thus reducing losses, while pleasing the regulators. Fannie Mae and Freddie Mac recently implemented new rules regarding this which some say favors outsourcing to AMCs. Second, it saves the bank money. Banks have high overhead and cannot compete with the efficiencies of AMCs. Finally, some banks are subscribing to vendor management because of federal Real Estate Settlement Procedures Act (RESPA) laws. RESPA, in part, is designed to protect consumers from fee gouging. Banks must account for closing cost fees charged to customers. It is hard for them to define and recoup all of these costs. Collectively, these issues cause banks to outsource their appraisals. It is easy to explain to regulators, it protects their bottom line and it frees bank managers to do what they do best, make loans.
Now, back to who would object to banks outsourcing appraisals. Ironically, it seems to be okay with everyone except some in the appraisal profession. One may think that all appraisers would appreciate the reduced loan officer pressure offered by the AMCs. This is simply not always the case. Some appraisers find AMCs to be the enemy. Appraisers and appraisal organizations are banning together to promote anti-AMC legislation at the state level requiring, among other things, that AMCs register with state appraisal boards. Among those other requirements are large registration fees and complex regulatory demands.
Some say that requiring AMCs to register in 50 states and to comply with all regulations will put them out of business. This would appear to be the goal of those sponsoring the legislation. There are two primary reasons for this. First, many appraisers do not like the scrutiny offered by AMCs and prefer the more relaxed relationship and oversight of the lender. There is opposition to delivery schedule timetables sometimes imposed by some AMCs as well. There is further opposition to the AMC appraiser-fee controls, as we have experienced by the medical profession with doctors. It should be noted that not all AMCs operate the same, nor do they have the same policies. Just as with banks and appraisers, not all AMCs are perfect. Second, in spite of what many appraisers say about wanting independence, some are willing to trade this for the cozy relationship they enjoy with lenders, who select them to do work.
Appraisers have the option of either doing AMC work or declining it. Appraisal management is part of our free enterprise system.
There are misconceptions about fees collected and paid by AMCs. I have heard appraisers say that AMCs collect full fees and pay out only a portion of the fee to the appraiser. AMCs do operate on a gross margin of profit as any business, and no management company is going to be any more willing or able to perform services for free than appraisers would be.
Fees vary, but let’s say that the average fee charged by an appraisal management company is $360 for a standard home appraisal. Gross margins before expenses, which AMCs typically earn, range between 30 and 40 percent of the fee charged, or let’s say approximately one-third of the fees charged. Therefore, the AMC will pay the appraiser, on average, about $240, leaving the AMC $120 to pay all of its expenses and cover any profit that it may make. For this fee, the AMC must accept the order, proof and edit it, select the best appraiser, negotiate a fee, place the order, monitor the progress, take product delivery, review the appraisal, supervise corrections, ship the appraisal, field any client questions, bill the client, pay the appraiser, collect client fees and securely store the product for five years. These functions of the process involve mostly labor. They do not reflect other overhead costs experienced by the AMC, such as rent, utilities, janitorial, liability insurance, equipment, supplies, advertising and technology.
There will be varying opinions on AMCs and their role in the vendor management process. It is not suggested that every lender should use an AMC or that every appraiser should work for one. Lenders and appraisers have the right to pursue any business relationships they choose. They should be allowed to exercise this right without disruption from those who do not have a dog in the fight. AMC registration in each state is simply a burdensome minefield and is perceived by some as a violation of free trade. Any AMC regulation should be at the federal level, only one fee should be charged and rules should be uniform across the country.
Finally, it is, without question, that AMCs offer by far the best possible solution to deter mortgage fraud. The true separation of the lending and appraisal process can only be accomplished in this manner. The process removes most of the opportunity and temptation for participants to become involved in collusion, which is the root of most fraud cases. AMCs also represent our best option for holding down mortgage fee cost to consumers and encouraging competition among appraisers. In these trying economic times, given the mortgage crisis and the economic meltdown, AMCs represent a bright ray of positive direction for the mortgage industry.
Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889.