Mortgage brokers did not create the high-risk non-conforming loans with high margins, minimal downpayments and low credit score requirements of the housing crisis in 2008. Banks and Wall Street did. But mortgage brokers received much of the blame.
While it is true that occasionally appraisers were coerced by brokers, loan values were determined by both appraisers and the lenders’ collateral review departments. In the fallout of the financial crisis, lawmakers passed the Dodd–Frank Wall Street Reform and Consumer Protection Act to overhaul the mortgage financial regulations.
One of the provisions of the legislation was to establish appraiser independence. In effect, appraisals were to be ordered through a third-party company. This led to the rise in the number of appraisal management companies.
The third-party company would act as a buffer between the originator and the appraiser. In theory, it would ensure that the bank or broker would not engage in dialogue with the appraiser, eliminating any possibility of coercion. While it did eliminate dialogue between the two parties, the impact of the rule may have brought with it more negatives than positives.
Increased costs
Appraisal management companies have been around for decades. But these companies really rose to prominence after the financial crisis. One critic is veteran appraiser Donald J. Sarley. He says that some appraisal management companies maintain that their services save lenders and brokers time, energy and money.
Sarley, who served as the president of the Southeast Florida Chapter of the Appraisal Institute in 2010 and is also a real estate agent, contends that this is false. In fact, he argues that the fee charged by the appraisal management companies adds to the overall appraisal cost.
“Management companies do little to help the industry and add an extra layer of bureaucracy and expense,” Sarley said. “They profess to keep the appraiser independent but simple facilitation inside a lending operation or utilizing a platform solves this issue for less cost.”
By one estimate, appraisals costs have risen from as low as $250 in the early 1990s to more than $1,000 for standard appraisals. For larger homes, remote locations and unique properties, these costs can rise even higher. Sarley also argues that the appraisal management company process encourages appraisers to work independently of each other, which means newer appraisers are not being mentored by older, more experienced professionals.
Additional shortcomings
When a bank or broker orders an appraisal under the current system, the request is assigned to a pool. The appraiser is selected based on rotation. What is seldom mentioned is the fact that many of the marginal appraisers draw their work from these random pools. As a result, they can stay in the business. Otherwise, they would die on the vine for lack of business.
Another of the shortcomings of the appraisal management company approach is the arm’s-length aspect has added time to the home appraisal process. This ends up costing more money which is passed onto the consumer.
Sarley points to one area of real estate where appraisal management companies aren’t required. “Commercial lending does not utilize management companies or facilitators as much and the system still works just fine,” he said. In short, the appraisal management company concept is simply a bad idea. Not only does it slow the process, but it keeps mediocre appraisers in the business. It is time to reassess.
Author
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Jeff Willis is a mortgage loan originator-adviser with Ocean Capital Lending. Originally from El Dorado, Arkansas, Willis graduated from Louisiana State University with a double major in journalism and history. He worked in broadcast television for 20 years before switching to banking and financial services in 1999. He authored the book, “E is for English” in 2010. In 2022, he completed “Conveyance,” a five-part historical novel following a Louisiana family which emancipated, educated and deeded land to their slaves, a full five years before the Civil War.