My professional life revolves around real estate. And although I am dually licensed as an agent and as a real estate appraiser my appraisal business accounts for 80-90% of my income and for all intensive purposes I consider myself a real estate appraiser. The real estate appraiser is purported to be the local market expert for real estate in his area. Even more so then the real estate agents the appraiser studies trends, news, data and keeps up to date with what is going on in their local real estate market. They are supposed to be an impartial entity that has no direct interest in any given transaction. It is their local knowledge that is supposed to contribute heavily to their expertise requiring them to be geographically competent in the areas they are appraising and familiar with the markets that service the property types they are appraising.
In the real estate purchasing process there are several professionals involved in the process. For this post there are three that we’re going to focus on, the buyer, their lender and/or loan originator and the real estate appraiser. The appraiser is hired as a third party unbiased professional to provide an opinion of value of the home to help assure the lender that the home which is the collateral for the loan is worth a certain amount in respect to the loan. The key here is the third party unbiased opinion of value the appraiser provides. Their impartiality and being free of influence is the key to the profession and their involvement. Until recently the appraiser was hired by the broker who originated the loan directly with that contact. In this manner the appraiser was able to build a working relationship with their clients and compete for their business. Now as I mentioned this was until recently. Thanks to a lawsuit from the Attorney General of New York regarding Fannie Mae’s appraisal quality assurance guidelines, a trend which was initially agreed upon by Fannie Mae (the largest purchaser of mortgages on the secondary market) has been forcefully adopted by the majority of the industry and is now being taken fully into the system through FHA loans. This trend is that appraisals have to be ordered with no contact from the mortgage originator to the appraiser, meaning that the originator has no contact, knowledge, choice in or otherwise influence on the appraiser that is going to be utilized. This comes from the fact that prior to these regulations forms of collusion existed in the marketplace between some appraisers and some loan originators. The concept is by removing the contact between appraiser’s and originators collusion on values and appraiser pressure to omit and overlook negative factors of a home will be eliminated. And this is all well and good but it comes with a tradeoff. It assumes to negate risk on the part of the lenders through regulation (which is another discussion for another post – think... no bail out, let them fail and they’ll wise up. Moral hazards anyone?).
So what has happened as an offspring of this is the rise of AMCs (Appraisal Management Companies). These are third parties that the loan originators order appraisals from. These AMCs and have a roster of appraiser’s from across the country. The benefits are negligible but do include the desired erection of a barrier of communication between the loan originators and the appraisers. This has, definitely reduced the influence and pressures on the appraisers. I can testify to that from firsthand knowledge and it is the surface reason for this legislation. However the true intention of the legislation is to provide more accurate and honest appraisal products. That is where the failure of the industry standard which was born out of government force or threat of force comes in. AMCs are little more than order shuffling and processing companies who hire appraisers with minimal vetting. There incentives and business volume are almost exclusively based on turn time of the appraisal product and competitive pricing which in and of itself is not an issue if that is what the market demands. However at least initially the lack of vetting has changed the structure of the product received by the lender and has been a serious dampener on competition for appraisers. How good an appraiser is how knowledgeable they are and how it contributes to the accuracy range of their valuation have now become non-competing factors. The market showed that until the new regulations were introduced these were important to lenders (this was derived from the fact that these are what lenders were rostering appraisers for during the free market competition era of appraisers). Now several appraisers have left the industry due to regulation after years of being in the same business losing most of their clients overnight. Furthermore appraisers with a smaller skill set and less experience are being employed as they will often compete on price and speed while producing a product of what has in the past been lower quality. If this was a result of a shift in the industry based on a calculated trade off of accuracy vs. time and speed on the part of the clients and appraisers then that would be fine, and in the future the market will most likely adjust to accommodate that. However this has arisen from intervention politics and is resulting in a government failure of policy trumping local knowledge. So this legislation has ‘solved’ a surface issue and in doing so created a new face for the same core problem and most likely in a proportion of risk that the market would not normally produce. They have forced a regulation that squashes the benefits of local knowledge and market competition and created the growth of something else.