REFinBlog

Editor: David Reiss
Brooklyn Law School

April 3, 2018

Who’s Appraising Your New Home?

By David Reiss

Researchers at the Federal Housing Finance Agency have posted a working paper, Are Appraisal Management Companies Value-Adding? — Stylized Facts from AMC and Non-AMC Appraisals. The obscure title hides an important subject.  AMCs, appraisal management companies, are intermediaries that prevent lenders from pressuring appraisers to give high appraisals. This was a big problem in the years leading up to the financial crisis as the mortgage securitization pipeline demanded to be fed and would not let something as unimportant as a low appraisal slow down mortgage originations. Not everyone agrees that AMCs have lived up to the hopes that reformers had for them:

AMC advocates believe that in addition to acting as firewalls between lenders and appraisers, AMCs contribute a quality assurance step to the appraisal process. Some advocates may believe additionally that the thriving of AMCs represents an increasing specialization of appraisal management and appraisal services. Each of these circumstances would lead to consumers acquiring less biased and better quality appraisal reports and consequently to lenders achieving reduced credit risk as well as reduced management time and effort. Those on the other side of the debate believe that AMCs offer no quality assurance contribution and in fact tend to hire the least expensive rather than the most suitable appraisers. They also claim that AMCs set unrealistic deadlines, effectively rushing appraisal reports. Under these circumstances, rather than having higher quality appraisals, AMCs could in fact reduce the overall quality of appraisals, and in doing so, increase credit risk in the long run. Opponents also cite the fact that because AMCs take a cut of prevailing appraisal fees, their prevalence has caused and will continue to cause an appraiser shortage, the result of which, ceteris paribus, is increasing appraisal costs for future borrowers.

The need for a lender-appraiser firewall has been documented in a number of papers. Research has highlighted that appraisers face pressure from lenders. Such pressure along with other factors have led to some appraisers viewing themselves more as price validators than as independent evaluators. If AMCs serve successfully as firewalls, they should be able to correct the established appraisal confirmation bias and lower the degree of overvaluation.

The second main way in which AMCs can theoretically increase appraisal quality is by serving as a fresh pair of eyes. An appraiser may be unable to catch many of her own mistakes; working autonomously, those mistakes could go undiscovered. An AMC can implement a review process to identify errors and inconsistencies and improve the overall quality. (3, citations omitted)

As noted in their abstract, the authors

find that compared to non-AMC appraisals, AMC appraisals on average share a similar degree of overvaluation despite being more prone to contract price confirmation and super-overvaluation. AMC appraisals also share a similar propensity for mistakes, despite employing a greater number of comparable properties. Our evaluation employs relatively simple statistical comparisons, but the results indicate no clear evidence of any systematic quality differences between appraisals associated and unassociated with AMCs.

So, it is not clear whether AMCs have brought all that much value to the mortgage business. Further research is warranted to see whether they are worth keeping in their current form or whether further reforms are called for in the appraisal industry.

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