Appraisals: The cost and quality of the final product
If you have paid for a home appraisal within the last five years, a chunk of that charge likely went to a middleman that you didn’t even know existed. And because a third party was used, it may have driven up your closing costs and also affected the quality of the valuation.
Lenders often use appraisal management companies to block collusion between mortgage brokers and appraisers – and to comply with anti-fraud rules the industry adopted in May 2009. These middleman companies – some of which are owned or controlled by the biggest banks – say that they protect consumers by ensuring appraisals are timely, accurate and untouched by fraud. There services have been around for 20+ years, but the discourse on what they can and can’t do by law is fresh. Roughly half of the states, including California, regulate appraisal management companies. The rest have until 2013 to 2014 to catch up.
If a borrower found out an AMC (Appraisal Management Company) was taking $250 (from a $500 fee,) their first reaction would be, “How does it help me, the borrower? What’s an AMC and why do I care?”
So who are the middleman companies?
During the housing boom, it is believed that all appraisers succumbed to pressure from loan officers to overvalue homes. The result was bigger mortgages, which meant bigger commissions for all parties involved. Andrew M. Cuomo, then attorney general of New York, detailed the widely spreading scheme in a 2007 lawsuit that placed blame on now defunct Washington Mutual and eAppraiseIT, who was the company that WaMu hired to manage appraisals orders. This landmark case led to a May 2009 requirement to separate mortgage brokers and appraisers in the lending process. The change, considered well-meaning then but is reviled by appraisers and real estate agents now, was folded into the Dodd-Frank Act, the comprehensive financial reform that was passed in 2010.
To set up the prescribed firewall, lenders can create an in-house appraisal department or appoint an employee within the company who would not benefit from loan production. Most lenders instead contracted third party firms whose functions are to assign, manage, and deliver finished appraisals. Banks like them for their vast geographic reach and quick access to appraisers. Above all, lenders believe using such services would “easily demonstrate compliance” with the new rules, the Government Accountability Office said in a July report on the residential appraisal business.
So Where do the Fees Go?
Up to 80% of home appraisals in the US are ordered through appraisal management companies, up from less than 50% before lending regulations tightened in 2009, based on estimates in the GAO study.
US consumers on average pay about 20% more for home appraisals now that the popularity of appraisal managers has grown. The typical rate for borrowers in San Diego County is $400-$550. About half of that goes to the appraiser, while the rest goes to an appraisal manager. In the past, the appraisers routinely were paid the full fee.
Is Quality Compromised?
Once borrowers pay the appraisal fee, the lender sends the order to the middleman company that’s tasked to find an appraiser. What happens next could reveal a lot about the quality of the valuation, insiders say. Some companies release single proposals to individuals. But some also follow this format: A blast is sent out by email and text message to contact pools as large as 50. The first to respond and agree to a certain price usually get the assignment. This is causing More experienced appraisers are leaving the industry as appraisal fees trend lower.
The departure of experienced appraisers from the field has made way for novices who are willing to travel longer distances to fulfill orders or likely cram more into their schedules to make up for lower rates.
So, the answer is yes the quality has been compromised with appraisals from inexperienced or out-of-the-area appraisers.
What’s Next?
The future of appraisal management companies appears to be murky. The yearlong study reported some lenders may start their own appraiser networks to save on what they pay to outsource their appraisal orders.
