The Home Valuation Code of Conduct, or HVCC, adopted in May 2009 started the appraisal industry on a wild ride that saw the creation of a multitude of new middlemen known as appraisal management companies, or AMCs. The regulatory changes intended that lenders would have to use AMCs to randomly select the appraiser for the home loan, thereby breaking up any collusion in price fixing.
Unfortunately, lenders also were allowed to own AMCs (only our government would think of this) as long as there was “separation” between the entities. Of course, there is minimal oversight of this loophole. This scenario has created winners and losers.
So who loses? The appraisers, for one. Although current federal regulation states that an appraiser be paid what is “reasonable and customary” for this market, it’s widely known that appraisers may now only receive a portion of the usual $350 to $500 collected on the HUD. I have personally heard of as little as $150 making it into the appraiser’s pocket.
On top of that, the larger lenders that refer business to their affiliated AMCs cause the appraiser pool to be much bigger geographically.
I had an appraiser come from the Mechanicsburg area to valuate a Mount Joy property. The individual led me to understand that he had never been in the area of the home being valuated (in fact, I don’t think he had access to the Lancaster MLS to search for comparable sales), but he had been selected by the AMC. These situations, especially combined with “drive-by” appraisals, can wreak havoc on accuracy.
This leads to the key losers in this new arrangement: the homebuyer and his or her new neighbors.
The homebuyer loses because he or she is likely overpaying for the appraisal, with a sizable chunk going directly into the lender’s pocket. Then, he or she loses if an inexperienced (many independent appraisers won’t work for what the AMCs are paying) or out-of-town appraiser undervalues the property. The sellers and neighbors lose here, too, for obvious reasons. Poorly done property valuations have serious long-term effects on neighborhoods and real people counting on equity in an already tough market environment.
The only real winner I can see in this setup is the lender, who can, via the in-house AMC, recoup a chunk of the appraisal fee as a profit center. The argument may be made that consumers are better protected from fraudulent collusion between lenders and appraisers in valuing homes, but I don’t buy it.
Seems to me like we need to be asking for more transparency on how our appraisals are sourced and paid, as well as who gets any difference in fees. Also, I for one think it’s important to stand up for the local independent appraiser, who knows the market and takes pride in their work. Kudos to the lenders who support them.
Jeff Geoghan is a residential real estate agent and founder of the Jeff Geoghan Realty Group in Lancaster County. He also hosts “YourLancasterHomeTV.” He holds a Green designation from the National Association of Realtors and blogs about homes and green issues.
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