‘Middleman’ Appraisers Spur Concerns
If you’ve paid for a home appraisal within the last five years, a chunk of that charge likely went to a middleman you never knew existed. And because a third party was used, it might have driven up your closing costs and 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.
The hotly debated reforms have boded well for the appraisal managers, whose presence in the U.S. has jumped from a handful in the 1990s to roughly 800 now. Their growth also has fueled industry concerns of increased borrower costs, compromised appraisal quality and unchecked authority.
These middleman companies — some of which are owned or controlled by the nation’s biggest banks including Bank of America and Well Fargo — say they protect consumers by ensuring appraisals are timely, accurate and untouched by fraud.
Their services have been around for 20-plus years, but the discourse on what they can and can’t do by law is fresh. Appraisal Institute, including California, regulate appraisal management companies. The rest have until 2013 to 2014 to catch up.
“It’s patchwork,” said Steve Sousa, the executive vice president of the Massachusetts Board of Real Estate Appraisers. “In some ways, I feel bad for the appraisal management companies … having to tailor operations state-by-state. It makes compliance that much more difficult.”
Who are the middleman companies?
During the housing boom, appraisers succumbed to pressure from loan officers to overvalue homes. The result was bigger mortgages, which meant bigger commissions for those involved.
Andrew M. Cuomo, then attorney general of New York, detailed the widespread scheme in a November 2007 lawsuit that placed blame on now-defunct Washington Mutual and eAppraiseIT, which was hired by WaMu to manage appraisal orders.
The 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 now, was folded into the Dodd-Frank Act, comprehensive financial reform that 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 federal Government Accountability Office said in a July report on the residential appraisal business.
Where do the fees go?
Up to 80 percent of home appraisals in the U.S. are ordered through appraisal management companies, up from less than 50 percent before lending regulations tightened in 2009, based on estimates in the GAO study.
The increased cost of lenders doing business with these companies has trickled down to borrowers.
U.S. consumers on average pay about 20 percent more for home appraisals now that the popularity of appraisal managers has grown, said Peter Vidi Jr., president of the American Guild of Appraisers, a national group with close to 1,000 members.
The typical rate for borrowers in San Diego County is $400 to $550. About half of that typically goes to the appraiser, while the rest goes to an appraisal manager. In the past, appraisers routinely were paid the full fee.
Carlsbad appraiser Don Lowe said he gets paid between $250 to $375 for what he calls “standard, noncomplex” orders that are below $1 million.
“We used to get $350 to $500,” Lowe said. “But that’s the (appraisal management company) profit now.”
William Fall — whose company, the William Fall Group, owns an appraisal management company based outside Houston — said the middlemen are worth it because they oversee the quality, timeliness and management of appraisals from an objective position.
“Many lenders find it is their best option,” said Fall, whose main appraisal company is based in Toledo, Ohio. “Appraisal management companies act as their agent and assist them in customer service, (fielding) responses and providing technology, which can be very expensive.”
The issue goes beyond price increases, said Richard Hagar, an appraiser based in Washington state who is often tapped by regulators and attorneys for his expertise. It’s also about being honest with borrowers.
The appraisal fee usually appears as one line item in mortgage documents, not two to reflect where the money is going.
“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?’?” Hagar said.
Certain federal officials and lenders have argued such disclosure could “be confusing to consumers” and that the appraisal fee accounts for only a small portion of total closing costs, findings from the GAO report show.
Is quality compromised?
What happens afterward 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, “depending on their database,” said Lowe, the appraiser from Carlsbad.
The first to respond and agree to a certain price usually gets the assignment.
Appraisers stress “usually,” because management companies have been known to renege on agreements.
“The appraiser would start the work, then it would be canceled because they found someone cheaper,” said Vidi, of the appraisers guild. “So the consumer is really not aware of the shenanigans involved.”
Miami-based appraiser Ron Schwartz typically charges $350 per order but is willing to slash up to $100 for larger companies. Even then, he occasionally gets beaten by someone willing to go lower, Schwartz said.
“I won’t do work for those companies, especially when they’re paying some people $175” for a $500 order, he added.
More experienced appraisers are leaving the industry as appraisal fees trend lower. Vidi, of the guild, fears more brain drain.
The number of appraiser licensees in California has fallen more than 35 percent since January 2007, dropping from 20,164 to 13,049 in October, based on statistics from the state’s Office of Real Estate Appraisers.
The departure of experienced appraisers from the field has made way for novices who are willing to travel longer distances to fulfill orders and likely cram more into their schedules to make up for lower rates, several appraisers have told the Union-Tribune.
Vidi said he’s heard of appraisers who have driven as far as six hours to conduct an appraisal.
Who has control?
The American Guild of Appraisers said Monday it’s weighing legal action against the Federal Reserve Board over recent regulations the national group says will cut appraiser pay and threaten the profession, said Vidi, the group’s president.
The debate centers on fees: who can set them and how. The Fed, in a recent decision, said appraiser pay is “reasonable and customary” if it’s:
- In line with what’s seen in the “geographic market of the property” but can be adjusted based on several factors, including the appraiser experience and property type.
- Based on lender-approved information, such as studies and fee schedules from “third parties” that include appraisal management companies.
The American Guild of Appraisers is against middleman companies calling the shots, and instead prefers using pricing already set by the U.S. Department of Veterans Affairs fee panel, which has state breakdowns, Vidi said.
“There are appraisal management companies that are good,” Vidi said. “But some control the delivery of the appraisal and the fees … To me, that’s the classic definition of an authorized monopoly.”
Fall, whose company owns the appraisal management company, said “it’s fair to say the value that we add to the equation, the individual appraiser doesn’t have to assume (in cost),” such as marketing and quality control.
The future of appraisal management companies appears to be murky, based on an assessment from the GAO report and recent departures of two such companies from the market.
The yearlong study reported some lenders may start their own appraiser networks to save on what they pay to outsource their appraisal orders.
Within the last five weeks, at least two national companies have left the appraisal business.
Local firm AppraiserLoft wound down its operations in early October because of the financial downturn, the company’s CEO said. The abrupt departure left appraisers across the country with unpaid invoices for hundreds or thousands of dollars, some dating back three to four months.
Earlier this month, Santa Ana-based CoreLogic reported in its third-quarter earnings report it has ended its appraisal management services, which year-to-date had more than $100 million in business, said company spokeswoman Alyson Austin. The company’s exit from this market was due “relatively weak profit characteristics,” CFO Frank Martell said during the third-quarter results call, according to the call’s transcript.
The federal watchdog report concluded this on the regulation of these middleman companies: There’s more work to be done.
“Despite the increased use of AMCs (appraisal management companies), direct federal oversight is limited because the focus of regulators is primarily on lenders, and state-level specific standards are uneven,” the report said.
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