Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I play a simple game of absolute havoc.

With the comment period of the Cuomo Fannie Mae agreement officially closed, it’s time to reflect on what it means to us. The word “havoc” is disaffectionately derived from the HVCC acronym for the Home Valuation Code of Conduct (Hat tip to Ann O’Rourke).

There has been a lot of anger originating from the appraisal profession, most of it warranted but some of it based on misinformation or misinterpretation. I think the Attorney General of New York, Andrew Cuomo and his staff were the first government entity to actually understand what appraisal pressure was, why it is bad and how if proliferated. For the first time someone started with the appraisal process and “followed the money.”

By forcing the GSEs not to purchase mortgages whose appraisals were ordered by mortgage brokers, they succeed in breaking the impact of self-dealing on property values.

I get pretty annoyed when mortgage brokers say they will go out of business without being able to order the appraisal and it will cost the consumer more. That thought is based on a premise that the appraisal result is influenced by the person ordering it who in turn is paid a commission. Please.

Dave Bigger of a la mode (who makes an awesome appraisal software product) was quite outspoken about this agreement several days before the close of the comment period.

In case you don’t know yet, the new regulations came out of a lawsuit brought by the New York Attorney General against Washington Mutual and eAppraiseIT, centered on coercion of appraisers.  In a settlement agreement spawned by the suit, the GSEs (Fannie Mae and Freddie Mac), and the Office of Federal Housing Enterprise Oversight (OFHEO) agreed to change national appraisal rules in exchange for the Attorney General’s office terminating its investigation of the GSEs. Unfortunately, while we believe the agreement has the best of intentions, the hastily written embedded regulations (called the “Home Valuation Code of Conduct”, or HVCC) do not solve the problem and in fact severely punish appraisers, and ultimately consumers.  If there ever was a case of the cure being worse than the disease, this is it.

He makes a great case with one significant flaw based on this comment:

The value of the client relationships you’ve nurtured, many times for decades, could disappear immediately under the HVCC as lenders are forced to shift their orders to AMCs.  You won’t even be able to speak to your current clients’ loan officers again if the HVCC is left as-is.

Here’s the problem with this argument: The mortgage lending system has no business allowing loan officers and appraisers to interact. This is old school and one of the reasons we are in this credit mess. Speaking to a loan officer is no different than speaking to a mortgage broker. It’s called collusion and has been in place so long, many of us don’t see it anymore.

Here’s the real problem with the HVCC concept and the deal in general: Appraisal Management Companies will be enabled by enforcement of this deal. This poses a significant threat to the appraisal industry for the wrong reasons yet I don’t see how this can be legislated out of the lending process.

Appraisal Management Companies survive on appraiser willing to work for fees that are typically half the market rate. Keeping costs low is certainly no crime, but it has been my experience that the appraisers who generally work for AMC companies don’t need to have much overhead because they don’t need to do any research. They fill out the form and arrive at the borrower’s estimate or the sales price. There is no penalty to the AMCs to reward this practice. I think the AMCs need to rep and warranty the mortgage or they have no skin in the game.

It has been my experience that employees in AMCs that interact with appraisers are very young and inexperienced (cheap) and are paid based on the average turn times and fees of appraisers under their control.

The AMCs are subject to pressure from their lending clients which is what brought Cuomo to take action in this matter (WaMu/eAppraisIT) just like appraisers are. There are no checks (no pun intended) and balances.

If mortgage brokers can’t order appraisals for mortgages, then the responsibility falls to the lenders again (which is not a bad thing since they are lending against the collateral being appraised). So who is the bank going to call to order hundreds of thousands of appraisals across the US next year? They have already severed most of their appraisal relationships by using AMCs or emphasizing wholesale lending channels for new business.

Banks will be forced to use AMCs to complete appraisal reports for their loans. Poor quality will replace poor reliability. We get to the same place as before but take a different path.

That means little good news for the good guys.

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6 Responses to “[Sounding Bored] AMC Enabler Wreaking Havoc With Best Intentions”

  1. Perplexed Appraiser says:

    Jonathan, although I am not an apologist for some of unacceptable practices of various Appraisal Management Companies, you do yourself and your readers a disservice by postulating on topics for which you obviously have little knowledge. For those with relevant insider knowledge of the more prolific AMC’s, your comments betray your inexperience with this topic. As free people, each of us entitled to form an opinion and to express that opinion, regardless of it’s accuracy. However, I challenge some of your sweeping statements as misguided and unqualified.

  2. Jonathan J. Miller says:

    Perplexed – thanks for your candor – be careful of the word “obvious”. I do have experience with AMCs and have also had plenty of work experience reviewing work done for AMCs. Yes there are good appraisers that work for them, but i believe they are the exception not the rule. Please share why you think I am misguided instead of being so generic in your commentary. It sheds no light on anything when you do that. I really want to understand why the AMC concept works and how the majority are pretty good at providing accurate valuation services. I have yet to meet anyone during my career that would agree with you position so you have peaked my interest.

  3. Not Perplexed one Iota says:

    I certainly do not know what Mr. Perplexed Appraiser is having such difficulty with regarding AMCs. They are the bane of every working residential appraiser’s existence, whether or not the individual appraiser is even outwardly aware of it. Fact 1 – The AMC offers the residential appraiser a bare pittance of a fee that is 40-60% of the full fee and demands the appraisal yesterday. Fact 2 – The quality that the individual appraiser will be able to uphold will be very low indeed. I am quite sure he/she will not be able to confirm the sales with the buyer, seller, broker, or attorney. I am sure that he/she will not be able to ascertain the conditions of the sale either. With the markets all over roiling because of the increase in foreclosures and sales concessions, is the individual appraiser properly disclosing this within his/her report for half the fee in half the time? There are many other things that we can banter over in regards to AMCs. I thought the opening salvo generating the HVCC was a good start. I do agree with you Jonathan that if they could revise the HVCC to hold BPOs and AVMs to the exact same standards as appraisals; and reel in the Mortgage Brokers so that they would at least have to develop some kind of blind/random way that they ordered appraisals, perhaps with the assistance of some combination of the lenders, the proposed IVPI, ASC, OFHEO, FNMA, and the state(s) appraisal boards. I think that this would be a good idea. Perhaps Mr. Perplexed Appraiser has some rational idea he/she could bring to the table. I would definitely consider any ideas he/she would like to put forth.

  4. Shane Trotta says:

    I find myself split on this issue. I do most of my work for AMC’s (two of them to be exact, and have decided not to work with others). I would like to say that there are the same issues with them that you will run into with any clients (except they all want cheaper fees). First off I understand a FAIR cut in fee for the services they provide; marketing, processing, quality control, etc. As we all know getting new clients is not only time exhausting, but expensive. Some of the better AMCs have good processing systems from which you can download the order into you forms software with one click and have the subject address and client info all imported right into your report along with any client file #’s, etc. And one AMC we do work with has one of the most stringent quality control personel I have ever seen; sometimes overkill, to the point where you have to explain in too much detail why you didn’t use comps they found, why you didn’t make bedroom adjustments, spelling errors, or whatever. These two AMCs are very understandable about time delays, additional fees for complex properties, etc. I enjoy working with them. On the other hand, we have your typical bank/lender/broker clients who just fax an order and let us do our thing at a full fee. WE LOVE THESE CLIENTS! however, many of the good ones already have trusted appraisers, and getting the work from them is hard work in itself. And about 90% of the broker work we receive is full of all the BS that we all complain about; value pressure, comp check requests, and excess time collecting fees. I think it is nieve to categorize all AMCs, all brokers, all banks/lenders into one pile. Some are good, some are bad. Some work with your business model, some do not. some want quality work, some want the right numbers. nobody who we are working with, we have to choose our clients smartly. -Shane

  5. jamie says:

    Could Perplexed be a partner in an AMC?

    The very case of the matter is brokers think that the value of a house depends on the loans they need to make a commission on. One is independent of the other. Fact is, all mortgage brokers should be regulated like stock brokers: licensing and education standards, phone calls monitored, no direct contact with appraisers ( Chinese Wall concept). They should have the principal of substitution taped on their phone or fax machine as a reminder of what the appraiser job is to determine in most cases: market value.

  6. Painting with a broad brush says:

    All appraiser’s produce low quality appraisals, have difficulty with basic communication skills, have minimal understanding of appraisal fundamentals, have minimal understanding of the mortgage finance industry, have minimal business skills, lack customer service skills, and complain incessantly. All AMC’s use newly minted appraisers, pay low wages, deliver poor quality appraisals, destroy the appraisal industry, rip-off the consumer, call for status five times per day, and employ ex-convicts and bubble-gum smacking teenie-boppers.

    Consider yourselves victimized by the broad brush!