Certain career paths come with the risk that your profession will make you unpopular. Lawyers, lobbyists and agents of the Internal Revenue Service may expect the occasional eye roll or grimace when answering the standard small-talk question, “What do you do?”
In the aftermath of the Great Recession, appraisers increasingly find themselves in the same situation. As I wrote last year, the search for housing bubble scapegoats targeted appraisers along with bankers, real estate developers and investment professionals, making them a handy punching bag for regulators and politicians looking for parties to blame.
Now, a system designed in response to the housing crisis may make borrowers feel even less warmly toward appraisers, although the fault lies elsewhere.
Most U.S. banks now use appraisal management companies, or AMCs, to hire appraisers for mortgage lending. These organizations represent an attempt to address the complaints that, in the runup to the housing crisis, banks pressured appraisers to present values high enough to support the desired loan, regardless of the property’s real value. The Mortgage Disclosure Improvement Act, which Congress passed in 2008, made banks warier of even the appearance of collusion. Though AMCs have existed since the 1960s, lenders have become much more reliant on them after the financial crisis as a way to prove that appraisers are indeed acting independently.
Appraisal management companies serve as a middleman between the mortgage lender and the appraiser. The theory is that AMCs put a layer of distance between appraisers and the banks that hire them, which is meant to ensure no undue pressure exists for appraisers to come back with a particular figure desired by the bank so it can justify the planned loan. However, AMCs charge a fee – which the borrower pays as part of the appraisal, though he or she may not be aware of it. Borrowers often pay one lump-sum appraisal fee but have no idea how much of that goes to the AMC and how much goes to the appraiser.
Jonathan J. Miller, president and CEO of New York-based real estate appraisers Miller Samuel Inc., told Think Realty that AMCs often get more than 50% of the borrower’s appraisal fee. “I’ve seen as much as 70 percent go to the AMC,” Miller said.
In essence, appraisers who want to work with AMCs must accept one of two realities. Either they will receive a fraction of the market rate for their services, or the AMC will ratchet up the appraisal rate significantly to make up the difference – and certain AMCs may blame the appraiser for the unusually high fee. Neither is a good outcome for anyone other than the AMC itself. Appraisers have also reported that AMCs sometimes discourage or forbid them from sending an itemized invoice to the borrower, meaning there is no good way to make clear how much of the fee is actually going to the professional doing the work.
Not every AMC is structured the same way. Some set a predetermined fee per order, independent of the appraiser fee for a given job. Some, however, quote a flat rate to the lender and then seek the appraiser who will do the job in question for the lowest fee. The AMC pockets the difference between what the borrower pays and what the appraiser agreed to be paid. AMCs set up this way have every incentive to seek the lowest bid on any given project, potentially affecting the appraisal’s quality and certainly discouraging experienced appraisers who seek something close to market value for their work.
Between increased regulatory scrutiny and AMCs’ effect on appraisers’ fees, the result has been decreasing numbers of appraisers. According to the Appraisal Institute, there were 92,750 active appraisers in 2009; by the end of 2017, that number had fallen to 82,208, despite the fact that home sales increased over the same period. The Institute predicts that numbers may continue to fall over the next five to 10 years, as older professionals retire, frustrated mid-career appraisers quit and fewer young adults enter the field.
Even as AMCs cut into appraisers’ livelihood, it is not clear whether they are even accomplishing their stated goal. Appraisers are subject to quality review in order to be on the panels, which means AMCs likely do little to insulate them from perceived pressure from banks and other lenders. An appraiser whose value judgments are overly conservative in the eyes of the AMC – or its customers, the banks – may find herself removed from a panel and thus cut off from multiple local lenders, rather than a single institution.
This is assuming that the problem of overly generous appraisals that AMCs are meant to solve even exists today in significant measure. My colleagues and I have found that, since the financial crisis, appraisers tend to be gun-shy. These days, they are more apt to undervalue a property than the reverse.
The most egregious fault in the existing system is that the AMC’s client is the bank. Until 2013, the lender was not even required to share the appraisal with the borrower, though the borrower was the one who paying for it. Lenders are now required to share a copy of the appraisal with the borrower, at least for first mortgages. But because the borrower isn’t the client, the borrowing public still seldom sees how much the AMCs charge and how little the appraisers earn, since in many places AMCs can still charge a bundled fee. News flash: Underpaid professionals are hard-pressed to do their best work and stay in business.
This last point, at least, has an easy solution. Legislation should ensure that if a borrower pays for an appraisal, that borrower should be entitled to see all of the details of that appraisal, including a detailed breakdown of the appraisal costs. Some states already require AMCs to break out the portion of the fees that go directly to the appraisers. But laws should ensure that, nationwide, borrowers as well as lenders are seeing exactly how much of the appraisal fee goes to the professional who does the appraising.
While such a change alone will not fix every problem with our current appraisal system, it will prevent borrowers from blaming appraisers for costs imposed by AMCs. Appraisers could stand at least that much of a break.