Appraisal company executives like Frank Danna have had to contend with increased costs and rising valuation prices while hoping to survive post-downturn reform. It doesn’t look as if it will get easier any time soon.
“Appraisal fees to the borrowers have had to be increased in order to pass on a larger fee to the appraiser from the appraisal management company,” says Danna, president of AMC and technology provider Appraisal Logistics.
The reasons are twofold, he says.
“You want to pass more of the fee onto the appraiser to get better service and better quality reports,” says Danna. “You also have to maintain compliance in terms of charging reasonable and customary’ fees.”
Keeping up with rising appraisal costs and quality demands while lenders are seeking cost efficiencies has been tough, but it is preferable to a situation where an AMC has to close its doors.
“I think it probably did drive some AMCs out of the industry. You still have to pay appraisers, and the margins are slim in the appraisal management space as it is,” says Clint Cornett, CEO of appraisal technology provider ValuTrac Software.
When AMCs have gone bust that has had potential liabilities for lenders and appraisers as well as the bankrupt company itself. A recent court ruling did absolve a lender of some of these liabilities, but only after some legal expense on the lender’s part.
AMC Evaluation Solutions owed appraisers money when it filed Chapter 7 bankruptcy. Appraisers tried to recover the funds from lender JPMorgan Chase until a Florida bankruptcy court this summer “permanently absolved” JPM of liability for the unpaid appraiser fees, Appraisal Institute reports show.
“Massive disregard for rules and regulations” is why AMCs and appraisers have to balance their finances on the increasingly thin line between their costs to keep up with post-downturn reforms, and the amounts they can charge financially squeezed lender clients.
Reform has added to costs, Danna says.
The average Washington, D.C., area appraisal price was about $350 before the advent of the Home Valuation Code of Conduct that marked the first round of reform, according to Danna. It went up to roughly $425 to $450 post-HVCC, he says.
“To maintain compliance you have to pay reasonable and customary fees, something that is not wholly defined by the regulators,” Danna says. “I have an opinion but it doesn’t necessarily match the opinion of others.”
The average pre-2008/HVCC fee is about $392 and the median is $375, according to Vladimir Bien-Aime, president and CEO of Global Data Management Systems LLC. The current average fee is around $452 and the median is about $475, he finds.
"We believe the price will increase slightly over current fees by about 10-15% due to shortage of appraisers, the new cost plus model and regulatory pressures," the Global DMS executive says. "We see an upward trend in quality since 2008 but there are many contributing factors.
"Our data demonstrates that there is a direct relationship between the price of an appraisal and quality over the last five years," he says. "Although paying for more qualified appraisers is a significant factor it is not the only factor that drives quality. The use of mortgage industry standards like MISMO which the GSEs require have helped improve quality. This new universal format allows provides a simple format so tools like automated reviews can work effectively. This makes it easy for lenders to reject sub-par appraisals on the front-end."
"The Dodd-Frank and CFPB regulation require lenders to implement a sound collateral valuation process and to monitor it consistently. This includes all major aspects including order processing, communications, vendor management, review and delivery to the GSEs. As a result many lenders have implemented technology to manage and monitor their appraisal process which contributes to the overall quality of their appraisals," the Global DMS executive adds.
“Appraisal fees are a function of the scope of work and time necessary to competently perform an appraisal assignment consistent with the Uniform Standards of Professional Appraisal Practice,” EMC2 Data’s chief valuation officer Eugene Pasymowski said in an email, when asked about this. “The client can file a complaint with a state board of real estate appraisers that the quality of a particular appraisal report is not consistent with the Uniform Standards of Professional Appraisal Practice. However the client cannot file a complaint with a state board of real estate appraisers that the fee was too high.
“In a free market the fee is negotiable between the client and the appraiser. A state board of real estate appraisers has no jurisdiction regarding appraisal fees,” he says.
“Average” appraisal costs are difficult to pin down because of the different geographic and situational variables involved such as the type of property, where the property is located, and the condition of the property, according to Pasymowski.
Danna felt as soon as the HVCC came into play, enforcing a firewall between lenders and appraisers, that becoming an AMC was the way for an appraisal company to best survive in the new environment.
“We needed to become a nationwide appraisal management company to retain clients,” says Danna, who previously had been running appraisal firm called Shoreline with a partner for more than a decade. “It’s
Appraisal prices are going to keep rising as more regulatory requirements in the works roll out and lenders increasingly choose vendors based on quality, Danna says.
Increased regulation has failed to uniformly boost quality, he says. He finds measures like increased continuing education requirements do help, but other cost pressures regulation puts on operations can emphasize quantity over quality. He believes regulation could do more to improve quality if it promoted, for example, correctly completed valuation forms.
AMCs are under financial pressure but they have some advantages in managing appraisal costs that they can pass on to lender clients.
“Satisfying interagency regulators and [Consumer Financial Protection Bureau] guidelines and requirements cost us $150,000, but we are very, very small segment [of lenders’ overall regulatory costs], and we can spread that cost across all our clients,” Danna says.
International business trends as well as regulation are putting new demands for quality and accuracy on appraisers and appraisal management companies, he says.
Banks in Europe are increasingly moving to prove they can fulfill the terms of certain designations set by the International Organization for Standardization for process quality management, specifically the ISO 9001:2008, he says. This takes 18 months and requires the hiring of on-staff auditors as well as continuing third-party verification of the standards every six months.
“That’s self-inflicted,” Danna says, but it is worth it for the competitive differentiation and the assurance it provides to lender clients in terms of the quality of the company’s work. The many, detailed policy and procedure requirements of ISO 9001:2008 are very similar to regulatory requirements imposed by the Consumer Financial Protection Bureau and interagency regulators, he says.
The one strategy appraisal market participants can employ as a cost saver while also promoting practices that support quality is technology, and several market participants have been selling proprietary automation to this end.
Controlling costs will be continue to be key going forward. Upward pressures on price will continue due to new state regulation as well as a diminishing appraiser workforce facing higher barriers to entry, Danna says. These trends at the time of this writing appeared likely to eventually increase the average D.C. appraisal to about $500 or $525, he says.
