Non-Lender Valuation: Consumers Should Tread Carefully
Competition, in a free market, is a fierce catalyst: one that can effectively sort out the bad apples from the bunch. Capitalism works, it is simple when left unfettered and when all parties are ethical in their approach to business. It works until politicians, however well meaning they try to be, step in with a”solution”. Through the Dodd-Frank reform and the Andrew Cuomo created Home Valuation Code of Conduct that predates Dodd-Frank, congress effectively went anti-small business again. I liken this profession’s recent undermining by congress to how they saw to sort out the small-family farmers by paving the way for companies like Monsanto and ConAgra.
Competition is fierce in the valuation profession these days. For competition to work, it does require a level playing field. Presently, in residential valuation, there is no such thing as a level playing field. There are still lots of mortgage-use reports to do, but these reports are being filtered through appraisal management companies (AMCs). The AMC model chooses the cheapest appraisers competency is a distant second to cost, and like most things, you get what you pay for.
The quality of appraisal reports ordered thorough AMCs is getting bad enough that members of the Appraisal Foundation (TAF) have been quoted recently in the media with some interesting points. In a recent Chicago Tribune, John Brenan, director of appraisal issues, is quoted as stating:
"First, there is no additional revenue to fund AMCs, so the fee that an appraiser would earn is now divided between the AMC and the appraiser. Appraisers are making less money, and they have a new middleman they wind up working through. They're looking to engage the cheapest and fastest appraisers. So, we're seeing appraisals done across the country where the appraiser does not have what is, in fact, required under standards we write for geographic competency" (Glink & Tamkin, 2013).
By Mr. Brenan’s comments, it is obvious that enough emphasis was not placed on the things that matter. Instead of requiring the banks to pay for the alteration, a market was enhanced for non-appraisal entities to make money. Instead of enhancing the appraisal process, they provided a market that actually counters retaining well-qualified appraisers. It is a pretty big deal when an organization like TAF is drawing attention to the deficiencies found in the appraisal profession. One should give pause when history has proven repeatedly what happens when the collateral of mortgages is not properly vetted. The recent mortgage bust was partially created by issues with appraisals.
I would also supplement that most of the problems fell squarely on the big banks and how they retained and utilized appraisal services. Instead of requiring lenders to do the correct thing with retaining qualified appraisers, AMCs were given preference as a means to outsource the responsibility or at least the appearance of responsibility. The lenders got the advantage of AMCs seeking out minimally qualified appraisers that follow narrow scope of works (SOWs). Rather than hiring appraisers that are both competent and confident, they hire those that are prone to following without question. They effectively dictate to a large section of these appraisers how to do their job.
I know what you are thinking: Fincham your title says non-lender valuation, so why are you writing about Dodd-Frank and AMCs? Good question…
Non-lender valuation is the last bastion of market share that exists where appraisers can actually bill at a commensurate rate. These types of assignments will include appraisal reports performed for many situations such as wealth-management, divorce, and other litigation related needs. Oftentimes, intended users need to find the most qualified and experienced appraisers. Well-vetted experts are most applicable when testimony is needed. As litigation and divorce proceedings have evolved over the years appraisers are not needed as much for testimony; a report will satisfy the streamlined processes. In these situations, attorneys are not as involved with selecting appraisers as they were in the past.
Attorneys understood the need of retaining the best appraiser he or she could find. They needed someone that could write reports well enough to be seamless and defensible but also handle cross-examination in a trial or handle the craziness that can be a pre-trial deposition. It takes a good professional to write the report, but an even greater one to be effective on the stand or to help with pre-trial preparation. In the case of wealth management: to talk to an accountant and walk them through a report or analysis on the phone.
With less emphasis placed on the interview skills of the appraiser, many attorneys have relegated the retainer of an appraiser back to the client. Most consumers do not really understand what they need. The consumer makes a call, or does an internet search, to find an appraiser based on the only criteria that the do understand: cost. They also negate the importance of selecting the right professional in case they may need testimony later in time.
They can contact a well-qualified appraiser that understands the work involved with their situational needs, or they can contact an appraiser that does mostly government sponsored enterprise (GSE) work. Appraisers that do mostly lender-use work within a very confined box, and unless they have a background in non-lender work, will likely not have the problem solving skills needed for thinking outside of that box. AMCs often provide such detailed instructions to their roster appraisers, that the appraiser is boxed into a very narrow scope of work (SOW). These appraisers are experts at meeting the SOW established with the AMC. However, what happens when these narrow SOWs are removed? You introduce someone that specializes in filling out a form to a world full of variables and possibilities.
An appraiser is only as valuable as their experiences allow them to be. Part of this value is knowing and recognizing the strengths and weaknesses of the approaches to value. An even bigger part is thinking in the abstract and knowing that in trials and depositions, an attorney will exploit a weakness in a report. They will discredit an otherwise good appraiser if that appraiser is incapable of dealing with questioning effectively. Appraisers that concentrate solely on mortgage-use reports have no background to be effective in these types of situations.
So How Does Dodd-Frank Tie In?
Therein lies my problem with the AMC bred and conditioned appraisers. The fees have been beaten down so low for mortgage work that the appraisers that only do AMC related work are now trying to compete in the more lucrative non-lender market. Here we have members of TAF acknowledging that the lender market is using less-than-optimal appraisers. That alone is enough to make a normal person pause and pay attention. This was Washington’s answer to a problem they did not understand, and by stepping in, they created waves that extend beyond their intended design. They destabilized the market for established and trusted professionals.
These same mortgage-use appraisers have discovered that non-lender work pays better: in some cases, much better. They capitalize on the naivety of the consumer base. In a sense, they are capitalizing on a competitive advantage, but only an artificial one that was created by the meddling of politicians. In a very real way, Dodd-Frank is now affecting the valuation profession outside of the mortgage business.
In that same Chicago Tribune article, David Bunton the president of TAF stated "Most appraisers not going to turn around a top quality appraisal in 24 hours, for half of the normal fee. So you get people who are less experienced, who have less business clientele, and they may end up driving 4 to 6 hours for $150. We're concerned about quality" (Glink & Tamkin, 2013).
Mr. Bunton, we are all concerned over quality. Those of us that have refined our toolsets and experience are being passed over for appraisers that have been subsidized by a flawed mortgage market that is propped up by the AMC model. The weak links of that subset of appraisers are now matriculating into non-lender work. In a way, the biggest user of appraisal services, the mortgage companies have once again undermined the appraisal process. By law, appraisers are required to abide by USPAP to preserve the public trust. Until lenders and AMCs are required to follow it, it will remain nothing more than a very effective tool to make those that claim to be ethical blend in with those of us that actually are beholden to our professional integrity.
The bottom line for appraisers, attempt to educate your attorney clients and colleagues on the differences between what a true professional appraiser is and what a primary mortgage-use appraiser is. Reach out and network with your bar associations and other professional organizations. Distinguish yourselves from the group through education and networking opportunities.
The bottom line for consumers: be careful whom you attempt to retain. Be willing to ask an appraiser why they are a better pick than market of other appraisers. Be willing to check references and ask for a resume. Take your time and make sure this appraiser is well qualified and not just minimally qualified. The inverse to you using a well qualified can actually cost you more money. If you end up in a trial, the cost to have your attorney reorder a better report, or pay a well qualified appraiser to assist in pre-trial analysis. Even worse, you may find that across the courtroom, your opponent hired the appraiser you should have, and now your mortgage-use appraiser will be in contrast to a superior professional.
Glink, I., & Tamkin, S. (2013, December 26). How do you get a great appraisal? Try eliminating the AMC. Retrieved from Chicago Tribune real estate: https://www.chicagotribune.com/classified/realestate/sns-201312221330--tms--realestmctnig-a20131226-20131226,0,4405990.column