The appraisal industry’s hidden hand

“AMCs have been terrible for appraisers, mortgage originators, and the public,” said Jeremy Bagott, appraiser at Bender Rosenthal.

For a person of principle like DeZarn, explaining his role leading an AMC made him defensive, apologetic, proud, and uncertain. 

Ultimately, DeZarn concluded, “We don’t know where this industry is going.”

Andrew Cuomo’s medium-sized idea

“AMCs have existed since the late 1960s,” explains a 2018 report by the Federal Housing Finance Agency, titled “Are Appraisal Management Companies Value-Adding?” “But they did not become key players in the home valuation industry until the recent housing bubble.”

That bubble was when, “Morally flexible lenders worked with morally flexible appraisers,” said Jonathan Miller of appraisal firm Miller Samuel. Appraisers would overvalue homes, and lenders would then originate loans, knowing mortgages would be ushered to their seats by government-sponsored enterprises Fannie Mae and Freddie Mac.

Appraisers who didn’t play the game “were blackballed by lenders,” said Joe Bryant, who today is the president of AMC TriServ Appraisal Management Solutions. 

In 2008, the state attorney’s general office of New York — led at the time by current Empire State governor Andrew Cuomo — launched an investigation into compromised appraiser reports.

The outcome was a settlement, the Home Valuation Code of Conduct, or, as appraisers swiftly dubbed it, havoc. Under the conduct code, Fannie Mae and Freddie Mac would only securitize mortgages from lenders that had a firewall between writing the loan and selecting an appraiser.

A variation of the conduct code was inserted into the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, and the modern AMC was off and running. 

“Soon, AMCs went from being involved in 10% of all appraisals to 90%,” Miller said.

“It started off rough,” said Mark Skapinetz, owner of What It’s Worth Appraisal Services in Marietta, Georgia. “Before the recession, I was doing appraisals for $500. Then, I was making $200 to $250.”

“What AMCs did was they made it all about competition,” DeZarn said. “Hey, if you do this appraisal for me for $200 instead of $400, you can get it.”

AMCs have since expunged such flagrant squeezing of the appraiser, DeZarn said. But tension, as they say, remains. 

The firewall in action

When the pandemic hit, appraisal management companies retreated from offices in the likes of Troy, Michigan and Buffalo, New York. The remote work was a further dislocation for an industry tied up in a most concrete transaction – the home sale.  

The AMC business model is to snare contracts from mortgage lenders, and serve as their appraiser middleman. 

The AMCs’ appraisal selection today starts with a list of appraisers, with all the different AMCs invariably drawing from a similar appraiser pool. “There is no special sauce,” Bryant said. “We all use the same appraisers.”

It’s a fairly big list that includes much of the U.S. residential appraiser workforce: San Francisco-headquartered Axis Appraisal Management Solutions, for example, put the number of appraisers on its list at 9,000. 

If a lender wants an AMC to appraise a home in, for example, Lincoln, Nebraska, the AMC will check their roster of Lincoln appraisers, and select the one they believe to have the quickest return rate and lowest potential for errors that later bottle-up the mortgage origination. 

The AMC will quote beforehand how much the appraiser will get paid, though with more experienced appraisers, and more difficult jobs, there is often negotiation, Bryant said. 

Typically, Bryant said, the AMC calls the appraiser’s cell phone or emails them, and gives a window of one business day to accept a job. If the appraiser says ‘no’ or never gets back to them or haggles too much about the fee, the AMC simply moves to whoever is next on the list. 

After an appraisal is completed, the lender pays the AMC, who then pays the appraiser and keeps a cut. 

Perhaps due to the shared labor pool – picture Uber and Lyft competing with hundreds of other rideshare apps – the food chain among AMCs is profoundly unclear.

Hundreds of AMCs are registered in each state. For example, California has 227. But no AMCs appear filed as publicly traded companies with the Securities and Exchange Commission, and few AMCs seem to have a public profile.

“It is a very sleepy profession,” Miller said.

One AMC generally acknowledged as a larger outfit is TriServ, which has a physical headquarters in Roswell, Georgia. 

TriServ, Bryant said, processes 18,000 appraisals a month. For each appraisal, the lender pays a $109 flat fee, regardless of whether the appraiser is valuing a 30-year-old single-family home that looks like every other home on the block, or a rural abode that may resemble a geodesic dome. 

For more complicated appraisals, Bryant and other AMCs interviewed, said the appraiser keeps the potential extra money from the lender. 

“Our hope is to make $150 an order,” said Kim Perotti, co-president of Axis Appraisal Management Solutions, whether an appraisal is quoted for $300 or $600 or whatever.

TriServ’s average flat fee multiplied by 18,000 appraisals per month puts TriServ’s expected gross revenue for the year for 2021 at $23.5 million. 

Expenses for AMCs include a licensing fee and surety bond companies pay state regulatory boards. The fees vary but are $4,000 per year, per state for licensing, and the bond is a non-refundable payment of $25,000 every two years. 

An AMC doing business in every state, then, could pay up to $825,000 a year in combined state regulatory costs, a definite pain in the neck but a small expense on the balance sheet. 

AMCs also pay fees to white-label software companies like ClosingCorp and LenderQB, who charge between $9 and $20 per appraisal report to convert the appraisal into a PDF, or whatever the preferred format, and ship it to the lender. 

For a company like TriServ, that service adds up to over $3 million a year. 

Another cost is employees. TriServ has over 50 employees, Bryant said, including former appraisers who manually review reports from the field.

Other AMCs interviewed, though, professed that they could not afford in-house appraisers. These AMCs, who declined to be quoted, had a mantra: Their business was “low-margin.” 

Fees in, paying appraisers

Vickie Rickard, an appraiser in Port Richey, Florida, said that she is on the appraiser list of 40 different AMCs, but that three years ago one of them was blowing up her inbox.

CoesterVMS, an AMC in Gaithersburg, Maryland, was always slow to pay Rickard, the appraiser said, but she decided to take nine different appraisal requests from the company. CoesterVMS billed the valuations as “rush orders,” meaning the lender would pay them right away if the appraisal was turned in within a certain time frame. They would then pay Rickard. 

Rickard never got paid. In the fall of 2019, Brian Coester, filed for Chapter 7 bankruptcy in Maryland federal court, after CoesterVMS went under. 

Rickard, who said that she is still owed $3,800 for her work, is one of multiple appraisers listed as creditors in the Coester bankruptcy. 

Some appraisers accuse AMCs of gouging them to the tune of a 50% or greater cut. 

“Appraisers are getting stiffed,” said Myra Lillard, chief appraiser at Home Guide Realty. “It is a hard pill to swallow, giving up half your pay.”

And then there are appraisers, like Rickard, who accuse AMCs of never paying them at all. 

“A number of appraisal companies have gone out of business, because they weren’t paying their appraisers in a timely manner,” acknowledged Bryant of AMC TriServ.

Part of the problem, these AMC executives say, is they’re not getting paid from the lender.  “Lenders are not quick about paying AMCs,” DeZarn said.

Lenders, in turn, acknowledge that they rarely evaluate AMCs based on timely appraiser payments.

“I’d be lying if I said that was my primary focus,” said Mark Gordon, chief revenue officer at Princeton Mortgage.

The AMC industry standard for paying external appraisers is 30 days after invoicing, but Nationwide Appraisal Network has spearheaded a program to reduce that time considerably, wiring payment within 24 hours of getting an invoice. “This new initiative has truly raised the bar within the industry,” NAN said in a statement.

State appraisal boards have deadlines of up to 60 days for when an AMC must pay an appraiser, and a smattering of non-payment complaints have found their way to these boards. 

The California Bureau of Real Estate Appraisers, for example, logged 26 complaints in the last five years regarding AMCs, said bureau spokesperson Michelle Cave. “Typically, complaints against AMCs are for failure to pay appraisal fees and attempting to improperly influence appraisers,” Cave emailed. 

The Illinois Department of Financial and Professional Regulation fined six AMCs in the last five years. In 2019, for instance, AMR Appraisal, which is headquartered in San Ramos, California, was fined $15,000 for failing to pay appraisers in a timely manner.

Perhaps the record shows that non-payments and excessive fees are more anecdotal than systemic. That’s at least what the AMC trade group, the Real Estate Valuation Advocacy Association, contends. 

REVAA is based in Waconia, Minnesota, a town of 10,000 people, and the home of Mark Schiffman, its executive director since 2014. Schiffman does not have a background in appraisal, as he was previously a faculty member at the for-profit University of Phoenix, and mayor of Waconia. The group does not maintain data on appraiser pay.

There are also no known attempts by federal or state regulators to do a wholesale evaluation of AMC pay practices. However, the aforementioned 2018 Federal Housing Finance Agency report touched on the subject. 

“Because AMCs take a cut of prevailing appraisal fees and decrease appraisers’ take-home pay,” the report read, “their growing prevalence may have contributed to an appraiser shortage.”

The shortage is documented by the Appraisal Institute, an appraiser trade group, which shows a steady decline in the profession’s ranks the last 10 years.

Including commercial appraisers, there were 78,000 active appraisers in 2019, per the Appraisal Institute. Twenty-one percent started their careers in the past decade. 

In the last 10 years, Skapinetz, the Georgia appraiser, said, appraisers have “left the industry in droves” due to AMCs, and it is hard to recruit replacements.

Rickard concurred: “We are at the mercy of the AMCs.”

Fees out, regulatory insanity

Lenders use AMCs to offload the burden of complying with appraiser independence requirements.

“AMCs are more a necessity than a requirement. Once Dodd-Frank came out, we needed appraiser independence. They’re really just middlemen and nothing else. The value add is compliance, more than anything else,” said Shashank Shekhar, CEO of Arcus Lending.

But AMCs, unlike other parts of the mortgage industry, receive little substantive scrutiny of their own compliance. 

“There’s not the same transparency,” said Princeton Mortgage’s Gordon. “It doesn’t exist in the AMC industry.”

If AMCs fail to maintain the originator-appraiser firewall, it’s not clear who would notice. The CFPB, according to Tom Westerfield, president of Fairway Mortgage’s subsidiary AMC, Frisco Lending Services, certainly isn’t checking.

“The CFPB will come after the lender, not AMCs, because the CFPB ensures lenders perform oversight of the AMCs they use,” said Westerfield.

The CFPB could not point to a single investigation or enforcement action regarding AMCs, and did not answer questions. 

Instead, the watchdog sent an extract from a rule defining AMC minimum standards, which it penned in 2015, with five other agencies, including the Office of the Comptroller of the Currency, the FHFA and the Federal Reserve. 

The rule gave appraisal management companies guidelines on how to tally their “panel,” the list of appraisers it brandishes to lenders. That’s important mostly to assess the $25 per-appraiser annual fee that states send on to the Appraisal Subcommittee, a late 1980s Congressional creation intended to oversee the appraisal profession. 

The paying of these fees was then cemented in a 2017 rule by the Federal Financial Institutions Examination Council, an interagency body of banking regulators formed three decades before CFPB was born. 

But these complex fee rules are quiet on actually enforcing the lender-appraiser firewall, the primary reason AMCs exist. The 2017 interagency rule gives states the authority to bring civil actions to ensure appraiser independence, but it doesn’t explain the particulars.

“Questions about what mechanisms a State agency may use to assess a party’s compliance,” the rule states, “Are outside the scope of this rulemaking.” 

The states seem to use this authority to, well, make yet more rules on fees, a frequent source of frustration for AMCs, especially those who operate in more than one state. 

The state-by-state patchwork keeps Kim Perotti of Axis Appraisal Management on a brisk itinerary to furnish fingerprints and notarize registration forms.

“I get fingerprinted every year in at least 30 states,” said Perotti. “The licensing is crazy.”

The firewall next time 

If appraisers once felt pressure to overvalue properties, today AMCs feel anxiety based on the swiftness in completing reports. 

Gordon said that Princeton Mortgage judges AMCs on their “guarantee of service.” And what, then, is service?

“Delivery times,” and “leveraging a more reliable product for consumers to close loans faster.” 

Amid the pandemic-era housing boom, lenders pit AMCs against each other and judge them on speed. 

“Pre-Covid we never used more than one AMC,” Shekhar said. “Now, every processor is ordering from three AMCs to see which will deliver the fastest.”

DeZarn, the Appraisal Management Services of America chief appraiser, says each week a representative from his AMC meets with lenders and defends their “return times.” 

The need for speed, the Kafkaesque fees and registrations, even the allegations of appraiser non-payment and underpayment. All of it might be a necessary price to pay, if there is evidence that the middleman does its thankless job, upholding the integrity of the valuations that underpin the home mortgages that underpin the trillion-dollar U.S. housing market. 

The evidence is unclear. 

On the one hand, AMCs have been as invisible as ever amid allegations of blatant racial discrimination by appraisers, and the valuation gap between white and minority-owned homes ever widening. 

While appraisers are the whipping boy for bias complaints, the opaque AMC has been largely spared. AMCs interviewed did not have instances of investigating appraisers on the panel for potential bias. Ferreting out discrimination would appear, at best, a secondary part of AMC’s duties to uphold integrity in the valuation process.

But, in defense of the AMC, there hasn’t been another mortgage meltdown.

“I think it has absolutely worked,” Bryant said. “The mortgage loans now are of much higher quality. A lot of the crazy loan programs have disappeared.”

Besides a palladium full of appraisers, the counter to Bryant is, again, that 2018 FHFA report, the proverbial oracle of delphi to the otherwise opaque AMC industry. The federal agency examined appraisals from 2012 to 2016 that went through an AMC, and appraisals that did not. 

The conclusion: “Scant evidence of any systemic quality differences between appraisals associated and unassociated with AMCs.” If anything, AMC appraisals, “Are subject to a slightly higher probability of contract price confirmation and overvaluation.” 

When the FHFA report came out, REVAA, the AMC trade group, released an eight-page repudiation. 

REVAA’s response focused on the FHFA’s nerve to release a study “without notice” to the trade group, and into a “hostile environment” for AMCs. REVAA lambasted FHFA for only focusing on the quality of appraisal reports, because “Lenders use AMCs for a variety of reasons including those that have nothing to do with quality.”

The reasons, REVAA noted, include safeguarding against undue influence and fraud, and “Protecting public safety by reviewing the background checks of appraisers before they can be employed or empaneled.”

Like some other AMC executives, DeZarn is a former appraiser with concern about the industry’s dwindling numbers. He thinks the decline has already changed the dynamic with AMCs. “Everybody competes for the same appraisers, so we want to treat them well for a long time,” DeZarn said. 

“It’s an interesting thing,” DeZarn said of appraisals. “You start becoming trained to look in a different way. Oh, that property is this close to a beach, or that close to a power line. You can’t go into a house and not notice everything. But after a while, when you are doing it for a long time, you can just shut that part of the mind down.”