As the year ends, it's become clear that some parts of the real estate world still don't work very well. That's particularly true of the appraisal business.
From being blamed for helping create the housing bubble to being blamed for prolonging the housing crisis, the industry has suffered greatly over the past few years. Probably the biggest debacle was the enactment (and then retraction) of the well-meaning (perhaps) but misguided Home Valuation Code of Conduct (HVCC).
One of the most unpopular elements of the HVCC was the requirement that appraisers work for appraisal management companies (AMCs). Unfortunately, these still exist, having been adopted by many lenders.
According to David Bunton, president of the Appraisal Foundation, it's "ironic" that the AMC model has gained traction.
"One of the big myths is that lenders are required to use AMCs. In fact, they are not. Lenders are required to have a firewall and separation between the lender's representative who hires the appraiser from the one who makes the final decision on whether the loan is approved," Bunton explained. "Out of convenience, lenders have decided not to keep this process in house."
John Brenan, director of appraisal issues for the Appraisal Foundation and an experienced real estate appraiser, says there are a couple of problems with the AMC model from the appraiser's standpoint. "First, there is no additional revenue to fund AMCs, so the fee that an appraiser would earn is now divided between the AMC and the appraiser. Appraisers are making less money, and they have a new middleman they wind up working through."
Indeed, Brenan says, AMCs are offering to produce more appraisals for less money. "They're looking to engage the cheapest and fastest appraisers. So, we're seeing appraisals done across the country where the appraiser does not have what is, in fact, required under standards we write for geographic competency," he explained.
Geographic competency means an appraisal has direct and deep working knowledge of an area. And that knowledge was key to being a good appraiser.
Here's how appraisals used to work: The agent would meet the appraiser at the door of the property with a stack of comps, and they'd discuss what was happening with sales in the local area in the past few months. The appraiser would be knowledgeable about the area, having worked in it for a long time. He or she would have direct contact with the agent, and most appraisals would come in at or just above the purchase price.
It worked like a charm -- until it didn't. During the housing boom, appraisers were accused of inflating home values in order to help keep banks approving more loans for bigger sums. After the bubble burst, appraisers were accused of not approving the values of enough homes, hence killing deals.
It's awful being an appraiser -- especially since AMCs were adopted, which have pushed down the price appraisers are paid and installed a middle company as an extra layer to "protect" the banks and the buyers. (It isn't that consumers are paying less, which is what the proponents of this model thought would happen.)
The upshot is that appraisers who have never stepped foot in a neighborhood and who have no historic knowledge are now paid less to do an appraisal, and the results have been, in the words of one appraiser, disastrous.
One real estate investor, who says he has been in the business for 38 years, has a real estate license, an MBA, and is a certified residential appraiser in California, wrote an email to us, saying, "Good luck to all those who want a loan because with the appraisal management companies (AMC) requiring lower and lower fees to stay in business, appraisers like me take fewer and fewer assignments. The appraisals will get worse and worse. I just reviewed an appraisal that did not even use the correct form, had the heating incorrect on the subject and the comps, and did not adjust for the comparables being end units."
That should be troubling to industry observers, participants and loud lobbying voices.
"Most appraisers not going to turn around a top quality appraisal in 24 hours, for half of the normal fee. So you get people who are less experienced, who have less business clientele, and they may end up driving 4 to 6 hours for $150. We're concerned about quality," said Bunton.
The real problem is that appraisals are as much art as a science. And, as Bunton puts it, "It's hard to institutionalize art."