The use of appraisal management companies does not result in higher quality property valuation reports, according to a working paper published by the Federal Housing Finance Agency.
AMCs act as a firewall — a role that came from the Home Valuation Code of Conduct introduced after the housing crisis — between the lender and an appraiser. From a quality perspective, they provide a fresh set of eyes looking at the appraisal report to prevent inaccuracies.
However, "a straightforward comparison of AMC and non-AMC appraisals...reveals that they involve a similar average degree of overvaluation and frequency of mistakes, but that AMC appraisals are more prone to contract price confirmation and extreme levels of overvaluation, despite tending to use a significantly greater number of comparable properties," wrote authors Jessica Shui and Shriya Murthy of the FHFA's Office of Policy Analysis & Research.
More competitive housing markets generally had more accurate appraisals than less competitive markets, the researchers found. But across the board, there is "no evidence overall that AMC appraisals are of higher quality than non-AMC appraisals or vice versa," the paper said.
Quality is no longer the primary benefit AMCs bring to the origination process, a shift that took place with the introduction of Collateral Underwriter by Fannie Mae in 2015, said Brian Coester, the CEO of CoesterVMS.
Lenders take the view that if the secondary market accepts the CU finding, the appraisal is OK. Appraisers are pretty good at doing their jobs, whether they work through an AMC or not, he said.
So AMCs today act as a facilitator and the working paper does not look at the value they bring from a business process standpoint. AMCs do "a million little things that have to be done before that loan can be sold into the secondary market, which have nothing to do with the appraised value or the quality of the report," Coester said.
That includes the day-to-day logistics of ordering and managing the appraisal, even the small tasks like processing the consumer's payment. Those tasks are hard for lenders to do on their own, he said.
The working paper looks at approximately 3.7 million AMC appraisals and 1.6 million non-AMC appraisals for purchase mortgages between the fourth quarter of 2012 and the first quarter of 2016. The appraisals were pulled from Uniform Appraisal Dataset submissions to Fannie Mae and Freddie Mac through the Uniform Collateral Data Portal.
In addition to analyzing the full sample set of appraisals, the researchers isolated a smaller pool of valuation reports that were prepared by appraisers who completed at least 20 AMC assignments and 20 non-AMC assignments per year. This "main sample" consisted of 858,688 AMC appraisals and 718,099 non-AMC appraisals and was designed to serve as a proxy for work performed by full-time appraisers.
The researchers looked at five appraisal quality measures, including listing the wrong property attributes and if the appraiser failed to find a sale of the same property that had occurred in the past three years. The last three areas — if the appraisal hit the exact price; how much it overvalued the property; and if it had an overvaluation of 6% or more — all were described as problematic by the researchers because of their high frequencies.
The study highlights the probability of any of these errors occurring, except when it came to overvaluation, which is presented as the average degree of overvaluation:
|Appraisal quality measures||AMC||Non-AMC||AMC||Non-AMC|
|Wrong property attributes||1.31%||1.13%||1.13%||1.11%|
|Failed to find a recent sale||0.98%||0.89%||0.79%||0.82%|
|Exact price match||26.41%||22.67%||23.95%||22.56%|
|Average percent overvaluation||2.22%||2.44%||2.24%||2.27%|
"The conclusions in this report indicate that the same issues with overvaluation and contract price confirmation in a small percentage of mortgage-lending appraisals exist whether a lender engages an appraiser directly or through an AMC," Ken Chitester, a spokesman for the Appraisal Institute, said in an email. The trade association for appraisers has previously raised concerns about AMC fee structures and valuation report quality.
"The AMC business model is attractive to lenders primarily because it seeks to ensure appraisal independence and to improve appraisal quality," he continued. "If AMCs aren't accomplishing those core functions, lenders should examine alternatives to engage competent and qualified appraisers who can provide credible and reliable valuations, including through direct engagement."
Going forward, AMCs can be more effective as a firewall and in providing quality assurance, Shui and Murthy said in their conclusion.
What's more, "borrowers' access to credit may be affected by this lack of effectiveness in the long run."
Specifically they point to AMC fee structures, which have been targeted as a cause of the appraiser shortage, the authors continued. "This shortage could lead to increased costs and growing timelines for appraisals in the future."
On the other hand, while the appraisal industry has said the AMC's pay structure leads to lower quality work, this paper's findings would directly refute that statement, Coester said.