Orlando Appraisal Blog
Warning: What you are about to read could be career-ending.
February 24th, 2010 12:39 PM
Warning: What you are about to read could be career-ending.
or me that is. But only if those who intend to drive a stake in to the heart of the AMC (Appraisal Management Company) industry win the day.
It’s worth it though, if it brings some people around to the genuine threat facing the mortgage lending ecosystem that state AMC registration laws pose. I remain convinced that federal AMC oversight is the safest, most effective, and least costly alternative, and is far better than the state-by-state approach underway. In fact, I wouldn't even be too worked up if there was a single, federal overseer, with states taking on the enforcement role. It's the 50 states crafting their own legislation that's worrisome. What some state legislatures propose to rein in AMCs will put them out of business.
But before it goes that far a few points are worth noting. I’ll use New Mexico’s proposed AMC act as just one example of what can happen when states attempts to regulate entities that they don’t understand on the advice and counsel of populist outrage.
Lenders have two (2) choices when it comes to managing appraisal panels.
They can do it themselves or have someone else do it. Each choice has advantages and disadvantages; and each involves tradeoffs. By outsourcing to an AMC, the lender avoids appraisal coordination costs that it would otherwise incur.
Appraisal coordination includes the cost of hiring, equipping, training, and supervising people to find and qualify appraisers, place and track orders, perform underwriting reviews of finished products, among other duties. By outsourcing, lenders avoid certain technology investments, labor burden, order volume fluctuations, and keep the appraiser and originator at arms-length.
Significantly, AMCs enable lenders to convert the numerous fixed costs associated with fee panel management into variable costs. Lenders managing fee panels themselves must invest in all the requisite resources to perform these functions on a mostly fixed-cost basis. And it adds yet another cost center managing non-core functions.
Hence we arrive at critical point number 1: Appraisal reports don’t just show up; someone must invest in IT, facilities and carbon-based resources to acquire them; the lender… or AMC.
Production cost + coordination cost = the total cost of any good or service.
Few would dispute that it costs something to coordinate appraisal transactions. We can debate the amount of the cost. But surely we’d agree that there is some coordination cost. Someone has to find the appraiser, perform a background check, negotiate fees, turnaround times, and delivery methods; handle customer complaints, status updates, and underwriting reviews; pay the appraiser and bill the customer.
Charlie Elliott, who operates one of the nation’s largest appraisal firms, put this cost at
$100 per appraisal
. My own pro formas support his estimate. And it’s important to consider that that’s the cost to an AMC; the cost to a lender self-managing a panel will be even greater. Why? Because, while an AMC approaches supplier management as a core-competency, a lender necessarily does not. AMCs spend tons of time and resources organizing their value chains to maximize productivity and innovation, and reducing overall operating costs. Cost saving is another advantage for lenders that use AMCs.
Thus we come to critical point number 2: There’s upwards of $100 in transaction coordination cost to an AMC above and beyond the cost of the appraisal; even more to a lender self-managing suppliers.
New Mexico proposes to cap AMC fees at 10 percent of the appraisal cost.
That’s the poison pill at the center of
Senate Bill 138
, which was introduced this month by Senator Mark Boitano. If it carries, an AMC that pays an appraiser say $250 would earn $25, just one-forth of its internal coordination cost; at $400 it would earn $40, a not much better two-fifths of its cost.
Therefore, a 10% fee cap would mean one of two things. The AMC would either need to pay the appraiser $1,000 per appraisal, to cover the $100 cost to coordinate the transaction, or leave. This would mean NM consumers would pay more than twice what they pay today, which won’t sit well. Or AMCs will bail on the state.
So here are critical point(s) 3 and 3.1: Arbitrary fee caps will put AMCs out of business, harming the mortgage lending ecosystem, and raising administrative costs. 3.1: Such clauses demonstrate a stunning lack of understanding of the economics of the business model being regulated.
All this is stacked atop a $1,000 AMC registration fee.
Last year, New Mexico passed an
AMC registration act
requiring AMCs to pay a $1,000 registration fee the first year (and $550 annually thereafter). Of course, this won’t much matter because few AMCs will make it past the one-year mark. But regardless, coupling the $1,000 registration fee with the 10% fee cap means an AMC that earns $25 (in fee-cap imposed earnings) needs to do 40 appraisals that year; at $40 they’d need 25 orders in year-one, or 2.1 per month. Not huge order numbers relatively speaking. But given that the fee cap guarantees a loss on each order it’s understandable why the better option is to bail.
This suggests critical point number 4: High registration fees only add to the twisted cost-benefit equation for doing business in a state; adding a fee cap is lethal poison.
The problem is clear. Someone must pay to coordinate the transaction. The coordination cost -- to AMC is upwards of $100 per order; to the lender potentially much more. Unable to pay premium appraisal fees to cover coordination costs under the cap, and having also to pay a $1,000 registration fee, and the specter of a large loss on each transaction, means that enacting NM SB 138 as-is will cause AMCs not to serve lenders that do business in New Mexico.
Four likely outcomes if I turn out to be right.
If I’m right there will be four (4) outcomes… beyond ridding the state of AMCs. The first is that other states will unwittingly adopt similar poison pills. Not understanding the unintended consequences of such a clause on not only AMCs but also mortgage lenders and mortgage availability to living, breathing, and voting taxpayers state legislators will view the fee cap poison pill as aspirin. It won’t be.
The second outcome will be that lenders who formerly used AMCs will suddenly have to manage appraisals themselves. This is significant given that 17 of the top 20 lenders use or own AMCs. Trouble is they won’t have the resources to tackle this new responsibility, at least for a while. And assuming they finally get their act together it is unlikely that lenders will replicate the productivity, innovation, cost controls and strategic advantage that the AMC industry – whose core competency after all is managing appraiser contracts and workflow – achieve currently.
The third outcome will be that lenders, faced with the prospect of building an AMC-light operation, will pass on the additional costs to consumers. These costs will prove significant. Beyond the coordination costs mentioned already, lenders would now need to reserve for risks they’re taking on. Some of these risks include HVCC compliance risk and reporting risk. Way more significant will be risk (and cost) associated with order volume volatility. Today, many lenders mitigate order volume volatility simply by placing more or fewer orders with AMCs. Absent that outsource safeguard, they’ll need to forever staff up and lay off workers in response to often wild swings in volume. Capacity will be constant anchor on profitability.
The forth outcome -- and there surely are more than just these -- is that we’ll quickly discover a disparity between the laws of various states with regard to bank-owned AMCs. Many states exempt banks from their AMC registration laws. I suspect this is to avoid going head to head with the existing federal bank exemption. Other states, including New Mexico, do not carve out banks from their AMC laws.
I’m not sure about how this bank-exemption thing will play out. However, in states that exempt banks, I suspect, bank-owned AMCs will claim the exemption. Should that strategy ultimately fail in a handful of states they’d simply bring the subsidiary AMC in-house as a department of the bank: the appraisal management department.
This article by Guest Blogger, Executive Director,
The TAVAMA Blog
Posted by Alex Olmo on February 24th, 2010 12:39 PM
Post a Comment
Subscribe to this blog
Leave a Comment
Characters from the image above:
Subscribe To My Blog
Characters from the image above:
Unacceptable Appraisal Practices - Fannie Mae
Appraisal and Property Related Frequently Asked Questions (FAQs)
Sunbelt Appraisals is a leading appraisals firm with over 10 years of experience in Maitland and surrounding areas
Sunbelt Appraisals is a leading appraisals firm with over 10 years of experience in Orange County and surrounding areas
10 year anniversary for Sunbelt Appraisals
What to Look for in an Orlando Appraiser
Average 30-year mortgage rates top 4%
Baldwin Park Trends
Average 30-year mortgage rate falls to 4.14%
Real Estate Humor
Reasons That May Warrant a Windermere Appraisal to Be Done
Gov. Scott Proposes Budget Plan
Latest Housing Starts Data -2014
Six Ways to Stay Out of Trouble
Approaching Retrospective Appraisals
Pressure Alive and Well: Stearns Lending Sued by Ex-Chief Appraiser
What happens if you wait to refi in 2014?
Bank of America Said to Send Property Reviews to India
Homebuilders struggle to find workers!
UAD "Hard stops" to start 6/22/13
Chelsea Clinton and Husband Marc Mezvinsky List NY Flatiron Condo!
Craig Wilburn: Speed Selling - Orlando Appraisals
Orlando Housing Market Report - March 2013
Olivia Wilde Lists Home for Sale, Buys in New York
How accurate is the Zillow Zestimate
Home-appraisal complaints rise in volatile resale market
CoreLogic: Five States Account for Nearly Half of all Foreclosures
Home prices rising fast, but gains could slow
Orlando Housing Market Report - August 2012
New Home Design: Less is More
Warning: What you are about to read could be career-ending.
Will this comp photo be accetable?
Obama Plan Provides State New Opportunity to Limit Foreclosures
FHA appraisal requirements
Why get out of the car to take the picture of the house I'm selling?
a la mode Releases Inaugural Edition of the National Appraisal Fee Reference(TM), Critical for FHA and RESPA Compliance
Housing construction up 2.8 percent in January!
Maryland Legislation Would Prohibit Appraisers from Knowing Contract Sales Price
Fannie, Freddie Agree to Buy $200 Million in Delinquent Loans
First Exposure Draft of Proposed Changes 2012-2013 USPAP
Hitler's dinner is ruined by AMC & Hitler rants on Appraisal Management Companies
Important FHA notice for all mortgagees
P. Diddy Lists New York Apartment for $8.5 Million
Housing recovery hindered by negative equity
Donna Summer’s Lasting (Real Estate) Legacy
Flawed Appraisals Killing Home Sales, Hampering Housing Recovery!
Inspection and Appraisal
Sunbelt Appraisals on Fox35!
Home prices lowest since 2002
Real Estate Appraisal Principles and Procedures
How to Help Boost Your Appraisal!!
8 ways to boost home appraisal values
8 ways to boost home appraisal values on MSNBC
The U.S. foreclosure crisis, Beverly Hills-style
HAPPY BIRTHDAY SUNBELT APPRAISALS!!
Unskilled Appraisers Seen as Problem
I made sure not to disturb this guy
USPAP changes for 2012
Getting the most value from an appraisal
Orlando Housing Market Report: November 2011
Orlando Housing Market Report - October 2011
Real Estate Appraisal Exterior Inspection
County appraisals don’t follow housing market trends
Being Green Can Help the Value of Your House
You'll Probably Be Surprised By How Square Footage Is Actually Measured!
Preparation is key for a proper appraisal!
Storm Dumped Load of Work on Real Estate Appraiser!
Former appraiser pleads guilty to wire fraud
Builders Advised Not to Hold Back From Giving Relevant Information to Appraisers!
Zillows not always right - The Fuzzy Math of Home Values!
You live where??
Appraisers are so powerful. We control the market!!!
ORRA Housing Report - August 2011!
ORRA Housing Report for July 2011 Housing Report
Intro to UAD: The Uniform Appraisal Dataset
Silly Underwriter Requests
The Forecloser - The Daily Show
Uniform Appraisal Dataset is coming soon!!
Funny Dodd Frank Video!
Check Out the Skinniest House in the World!
Appraisal Institute Warns Appraisers About Liabilities When Working with Some AMCs!
Glut of foreclosures keeps mounting as foreclosure sales decrease!
Fannie Mae's free online UAD tutorial
Why It's Time To Buy!
Now on YouTube - Florida Realtors®!
How many appraisers are there, by state?
Appraisal Institute Warns Appraisers About Liabilities When Working with Some AMCs
Live at Disney??
Finiti is hiring!
Renting Better than Homeownership
5th Anniversary for Sunbelt Appraisals!
Home sales tumble, prices are near 9-year low
The Result of Low Appraisal Fees
Whatever Happened to Quality Assurance in Residential Appraisals: Avoiding Risky Appraisals and Risky Loans
Claim Alert: Three easy steps to reduce your liability
Sunbelt Appraisal's 5th Anniversary!
Fun Florida Facts:
I dont know about you but Ive had worst comparables
Mortgage Snags Ahead as Appraiser Ranks Dwindle!
Appraisers Hurting Housing Market - Video
2010 list of failed banks
Special Report: What's a home worth? Pick a number, any number
Heath Ledger’s Former SoHo Apartment Hits the Market For $5 Million
These Are The 15 Housing Markets That Will Get Crushed The Hardest By 2012
HVCC gone! Now what? - Setting Goals for 2011
Highest and Best Use - Hair Salon or SFR?
As HAMP goes up in smoke, U.S. needs new housing plan!
I want to live in Awesometown!
Foreclosure fiasco frustrates homeowners!
'Joanie' Doesn't Love Foreclosure
Have direct access to your GARAGE from your master bathroom Great selling point
BofA suspends foreclosures in 23 states
USPAP 2012-2013 3rd Exposure Draft issued 9/29/10
Freshly manicured laminate flooring!
New Appraiser Independence Requirements Being Developed by Fannie Mae
Homebuilders' confidence stuck at 18-month low
Appraisal Institute Withdraws as Sponsor of The Appraisal Foundation!
Appraiser interviews AMC rep He makes too much sense
Fannie Mae Announcement SEL-2010-09 - Interior Photographs Required
This unstable real estate market affects everyone
Condos that cost less than cars
Foreclosures up in 75 percent of top U.S. metro areas!!
smallest home in the world
Fives of a kind!! Thats a great hand!!
Home-buying applications sink to 13-year low week
Home-buying applications sink to 13-year low
Renowned Connecticut ‘Round House’ for Sale - $1,750,000
One Tank Garage?
$75M mansion near Orlando selling 'as is'
What's the Most Popular Countertop for Kitchens?
New Home Sales Surge in April
Building codes are for wussies!
Uma Thurman’s Greenwich Village Townhouse Listed for $14.2M
Kanye West Selling Home for $3,995,000
7 Cities With Great Real Estate Deals
Still a long way to go on appraiser reforms
Sunbelt Appraisal at the Corporate 5k presented by IOA
Pending Home Sales Spike in February
You're All Wrong. Blame The APPRAISERS For The Mortgage Crisis
America's Growing Towns - Florida has 4 out of the top ten
Spring Outlook: Housing Sales Are Looking as Bleak as Ever
Top 10 Tech Things To Do Right Now
UCF to offer a Master of Science in real estate program!
Follow AI on Facebook and Twitter for Real-Time News
David H. Stevens details the new RESPA rule and the role of the broker and stabilization in housing
Spice Girl Attacks Appraiser!
HVCC takes another appraiser Rest in peace
Appraisers should consider source of money in comp sales price
September 2012 (1)
July 2012 (1)
May 2012 (4)
April 2012 (1)
March 2012 (4)
February 2012 (1)
January 2012 (4)
December 2011 (11)
November 2011 (2)
October 2011 (2)
September 2011 (2)
August 2011 (5)
July 2011 (3)
June 2011 (3)
May 2011 (3)
April 2011 (2)
March 2011 (3)
February 2011 (2)
January 2011 (4)
December 2010 (3)
November 2010 (6)
October 2010 (5)
September 2010 (5)
August 2010 (5)
July 2010 (8)
June 2010 (4)
May 2010 (4)
April 2010 (4)
March 2010 (8)
February 2010 (15)
Orlando Appraiser (1)
My Favorite Blogs:
Sites That Link to This Blog:
Have a question? Get in touch!
Thank you, we'll be in touch!