Appraisal-management companies can help shoulder part of lenders' growing valuation responsibilities, but more than ever mortgage companies need to make sure they do it right.
Oversight of AMCs is growing. Rules are still a moving target. AMCs may be the ones charged with doing what it takes to address these compliance challenges operationally, but lenders ultimately are the ones that could pay the price if anything goes wrong.
"The CFPB has made very crystal clear that they are not going to buy into a lender saying, 'I've hired a third-party company to do this work, so I really shouldn't be responsible for this,'" says Jeff Schurman, the former executive director of the Title and Appraiser Vendor Management Association. "The lender is responsible."
It is particularly important now that lenders know which aspects of AMC work to monitor to keep this liability in check. Federal regulators are establishing standards for states that register and supervise AMCs, and there are still some questions about how the nuances of new appraisal disclosure requirements should be interpreted.
AMC liability also has fairly broad implications for the industry because a majority of lenders still work with these companies, in spite of some originator opposition to their use in the past.
Appraisal management companies procure the appraisals for around 60% of loans originated these days, according to Elizabeth Green, principal consultant at rel-e-vant Solutions, an advisory firm based in Flagler Beach, Fla.
Their share has fallen over the last 12 to 18 months for several reasons, including the industry's loan volume decline. AMCs' market share peaked at 80% in 2009, after the debut of the Home Valuation Code of Conduct, Green says.
Their share nevertheless remains well above the 20% seen before the implementation of the HVCC and successor Dodd-Frank regulation. These rules require lenders to place buffers between appraisers and loan officers or mortgage brokers who might pressure an appraiser to inflate valuations.
“Most people in the industry are comfortable using AMCs,” says Justin Glass, a senior vice president at United Wholesale Mortgage, in Troy, Mich.
They are increasingly selective about it, though. Here are the five things a lender should look for in an AMC.
Among the latest compliance measures lenders should make sure AMCs are on top of today are Regulation B and state and federal oversight rules.
Lenders need to watch these particularly carefully because they are still taking shape and in some cases open to interpretation, even though regulators generally are known to allow for some adjustment to new rules.
For example, there are different takes on whether lenders must send consumers appraisal reviews in addition to appraisals to satisfy Reg B's requirement that the borrower gets a copy of anything reflecting the home’s value.
"I think some of the lenders are really challenged by that," says Vlad Bien-Aime, president and chief executive officer of appraisal management technology provider Global Data Management Systems LLC, in Lansdale, Pa.
Lenders should get their compliance experts to make a call on where to draw the line and make sure their AMCs are operating within Reg B's bounds, says Phil Huff, chief executive of Platinum Data Solutions, an Aliso Viejo, Calif.-based appraisal review firm.
QC That's 'Just Right'
Reg B also requires companies to make tough calls about quality control, since checking an appraiser's work might trigger a requirement to send a disclosure to a borrower.
There is so much emphasis on various types of quality control aimed managing risk in the industry that lenders hate to add another layer. It beats getting an appraisal value wrong, though.
Letting skewed valuations go through could be a short-term efficiency gain that generates long-term problems. It can cause a hold-up later in the process and open the door to the danger of running afoul of regulators, potentially putting into the secondary market a loan that could come back to haunt lenders in the form of a repurchase.
One way lenders can keep tabs on the process is to introduce yet another third party into the picture who objectively review the AMC's results.
AMCs and lenders are increasingly asking for very specific types of reviews by third parties in quality control.
There is a growing trend toward lenders and/or AMCs requiring appraisers to submit their appraisals for an automated third-party review before they upload them to the AMC's system, says Huff. In the past, the review more often took place after appraisal was submitted.
Some seek to balance the need for quality control with the need for efficiency by focusing on qualitative reviews, Huff says. A company may do this if its compliance expert rules that these reviews are not subject to Reg B's mandate to send all statements of home value to the consumer, he says. These reviews focus on measures designed to reflect how sound the appraisal is rather than stating actual values, says Huff. For example, a review would look at how the valuation measures up to comparable properties, typically a half mile away. This and other metrics would be used to generate a qualitative score that measures how accurate the appraisal is without stating any property values.
Other lenders and AMCs have other increasingly specific requirements for third party reviews, he says. Lenders tend to leave a lot of the appraisal process in AMCs' hands. This way the lenders can focus on what they do best. QC is worth managing more closely as a key contributor to their last line of defense against loan repurchases and compliance lapses. It also is potential factor in the smooth functioning of the origination process, which is central to lenders' profit centers.
Lenders that want AMCs to handle the origination process or anything else in a particular way need to ensure the wording of their service level agreements reflects this.
Also, these contracts are an important focus because they can help lenders specify how AMCs handle customer interactions on lenders' behalf.
"When you are a lender, you have got to have an SLA put in place for all your clients and vendors," says Allen Beydoun, also a senior vice president at United Wholesale. "When we look for vendors, we want to make sure they have SLAs in place so that they provide our brokers with elite client services."
Tech that Meets Lenders' Needs
Lenders need to ensure AMCs have the proper amount of automation to accommodate a smooth origination process as well as the exchange and review of appraisal information, says Beydoun. They also should have redundancies in place for disaster recovery.
Much automated appraisal procurement may be left in AMCs' hands if they are trusted business partners.
United Wholesale uses a good deal of proprietary technology for automation but has found AMCs are better equipped to handle the appraisal procurement process. However, the company makes sure AMCs' technologies interface with its own enough so that the lender can properly monitor third party partners' work.
"You really want to deal with AMCs that are on the cutting edge of technology," says Beydoun.
Lenders and AMCs have had a lot of incentives to continually develop their appraisal-related technology. The Federal Housing Administration will require lenders to submit full appraisals in the future. Fannie Mae and Freddie Mac have been requiring it for the last two years, more recently becoming more stringent about requirements in this area.
"Lenders are very, very nervous about Fannie Mae and Freddie Mac's QC process, which is extremely data driven," says Indecomm senior vice president Judy Wheatley.
AMCs also have an incentive to develop strong automation because it can offset waning origination revenue.
As recent market share statistics suggest, among the key things for lenders to look for when choosing AMC partners is whether they have the technology and other resources needed to survive competition.
"Costs for AMCs are definitely going to go up," says Bien-Aime, citing among other things growing licensing requirements.
Lenders need to make sure their AMCs can handle these costs because they have suffered at times when AMCs close. JPMorgan Chase ended up in litigation where it had to fight allegations it owed appraisers for payments that a defunct AMC failed to make, for example.
Among things to consider when sizing up AMCs' financial strength have is whether they have finances and/or business strategies built to withstand cyclical changes. Some AMCs provide appraisals for originators and servicers.
Some think the larger companies have an edge. Beydoun and Glass, the United Wholesale executives, have been most comfortable working with two national AMCs. Having at least two counterparties helps diversify risk in this area. Too large a group of AMCs to oversee could increase the supervisory workload to an unacceptable level for the lender.
Other lenders are more comfortable working with a smaller group of AMCs with regional expertise as a means of diversifying risk, according to Bien-Aime.