Recently the Appraisal Buzz had the opportunity to sit in and listen as Tony Pistilli, Chief Residential Appraiser at U.S. Bank, and Jeff Schurman, Executive Director of Leading Causes LLC, discussed Jeff's recently published article. If you haven't read it yet you can find the full version here. We highly recommend it as it a great read with a ton of pertinent information for appraisers and AMCs. We were enthralled by the conversation and were able to put together some of the highlights for all of our buzz readers.
Tony: Jeff, thank you for taking the time to join us and talk about your white paper "The Appraisal Management Company Full Fee Hypothesis." Your article defines the reasons why a "Full Fee" model is vital for the survival of AMC's in this age of market and financial changes. What are some of the main reasons you believe that the current appraisal and AMC models are unsustainable?
Jeff: Thanks, Tony. The mortgage finance industry has changed significantly in the last 30 years. Yet the AMC business model has remained substantially unchanged. We still follow the 3-day turnaround time convention our ancestors sold to consumer finance companies in the '80s. We still make margins by buying appraisals low and selling them at or near retail, discounting real value that both the appraiser and AMC bring to the transaction. Rick Grant and I wrote the paper to encourage AMC leaders to consider the benefits of paying appraisers their full retail fees and then charging lenders a separate fee for managing the transaction for them. Underlying our hypothesis is our belief that the full-fee or cost-plus model is necessary to ensure the future of these co-dependent industries.
Tony: Describe some of the recent changes that have precipitated this call for change.
Jeff: As recently as 5 years ago, AMCs managed between 5 and 17 percent of appraisal orders. In that time, appraisers survived and thrived despite the fact that most AMCs paid less than full fees. Revenue from AMC work, many appraisers said, was enough to pay the light bill and fill gaps in order pipelines. Appraisers relied on full-fee client business to remain profitable. The consolidation and nationalization of mortgage lending, along with centralized loan production, and the infusion of the HVCC (Home Valuation Code of Conduct) into the system fundamentally changed the appraisal acquisition model. Today, many appraisers who once managed to turn a profit with a 5:1 ratio of full-fee to discounted AMC-fee orders now contend with a 1:5 or 2:5 ratio. Meanwhile, AMC fees haven't risen to majority client levels. Appraisers are losing hope and dropping out of the profession. And prospective appraisers are finding better career prospects in fields like healthcare and IT. It's time for AMC leaders to re-imagine their industry now that they lead it.
Tony: Your paper outlines 20 benefits of the full-fee model; are there one or two benefits that stand out beyond the others?
Jeff: They all stand out, at least in our minds. We capped our discussion at 20 benefits but there are more. In fact, we've gotten emails from several industry leaders presenting additional benefits. And they're all important. However, if I had to choose just one overarching benefit I'd say it is this: Paying appraisers their full (or retail) fees removes the single-largest barrier to acceptance of AMC as legitimate business partners. Until and unless AMCs pay appraisers at or near their full-fee levels, they'll be viewed as predators rather than partners. That doesn't make for a healthy supplier/client relationship. Take that matter off the table and 95% of the contentiousness goes away.
Tony: You speak of how competition is the catalyst for many of the business practices in the appraisal industry. Do you believe that lenders place AMC's in the same competitive environment AMC's place appraisers?
Jeff: Yes. As much pressure as AMCs put on appraisers for fee concessions, turnaround times, and supporting documentation, mortgage lenders exert the same pressure on AMCs. Lenders seek certainty about what they're going to pay for appraisals, especially now with tolerances built into the Good Faith Estimate, and the specter of the Consumer Financial Protection Bureau (CFPB) looming large. Therefore, they'll negotiate location-dependent tiered pricing and pit one AMC against the other(s) to win the best pricing package.
Tony: What would happen if the industry switched to a model where the AMC fee was paid by the lender and not the consumer? Would Lenders become more conscious of the fees?
Jeff: Lenders scrutinize every settlement service fee looking for cost savings. Most look at the HUD-1 where they can see all the fees in a list form. They may glance at the appraisal fee on the HUD-1, and think, "Ok, that's reasonable," since most AMCs charge them a blended appraisal/AMC fee that's around the retail cost of an appraisal, and move on. I'm fairly certain though that this will change. Amid so many calls for transparency in mortgage disclosures, it seems to me CFPB will require the appraisal/AMC fee to be unbundled on the HUD. I support such a move for several reasons.
Tony: What are some of these reasons, in your view, for separating the appraisal and AMC fee?
Jeff: Appraisal reports do not simply show up on a loan officer's desk. Someone with local knowledge of the appraiser pool in the area must shepherd the order into, through, and out of the production pipeline. Thus the loan originator has exactly two choices: They can do this work themselves, or hire an AMC to do it for them. Either way, the lender incurs a transaction cost. Separating the appraisal production cost and the AMC transaction cost benefits the lender and consumer through clarity about what comprises the total cost of the appraisal transaction. It also benefits the AMC industry by providing clients a quantifiable means with which to compare their various AMC alternatives, as we explain in Benefit #8 (in the paper). A lender considering two AMCs can use the AMC fees as a negotiation point and as a means to quantify the value packages the AMCs offer in their proposals.
Tony: You suggest paying full fee will provide better quality appraisals; can you expand on that thought?
Jeff: The full-fee model will certainly attract a full complement of appraisers to the AMC industry. As a result, AMCs will gain leverage to demand the very best service quality. AMCs invest heavily in quality controls from end-to-end in the appraisal order, production, and delivery continuum. All this costs a lot of money, money that could be invested in paying appraisers full-fees and then demanding, not asking nicely and hoping for, appraisals to be delivered with a minimum tolerance for mistakes, post-delivery rework, addenda, re-orders, and such. It shifts the burden of accountability, and the quality investment, to where it should be… with the appraiser.
Tony: How do you rationalize the competing pressures of free market competition in negotiating fees versus what you admit in your paper could be viewed as violating the Sherman Anti-Trust Act?
Jeff: I kept thinking that President Reagan would be terribly disappointed in us. Actually, writing the paper helped us to clarify our thoughts on the trade-off of free market fee negotiations versus price fixing to solve a lingering problem. Our hope is that AMC leaders read the paper and contemplate an industry in which appraisers, and AMCs, are seen by lenders, politicians and regulators as valued advisors rather than necessary inconveniences that don't get along.
Tony: Leading Causes LLC has been championing this type of Cost-Plus Fee payment system. What are some of the methods you have been using to get this information out and who has been helping you with your message.
Jeff: I've launched the Mortgage Third Party Risk Blog, to discuss such topics as the inevitability of AMCs, why lenders and AMCs do what they do, and offer suggestions for how to compete in this new mortgage settlement services environment. Rick's firm, RGA Public Relations, is circulating the paper through mainstream and social media channels. And, we're coming up with a banner or badge we'll award to AMCs that commit to pay full fees that they can display on their homepages. I envision a light blue banner or badge that simply says, "FAIR." We're struggling though with what the acronym will stand for. The "FA" could be "Full Appraisal" but the "IR" remains elusive.
Tony: Well Jeff I really appreciate you taking the time to go over this topic and your white paper with me. This is an extremely interesting topic that will spark a lot of conversation and perhaps a lot of change in the appraisal industry. I applaud you for taking on this topic for the betterment of our business.
Jeff: Thank you, Tony. I hope it helps.
Jeff Schurman, CAE, is the executive director of Leading Causes LLC, a leadership and business development advisory firm that helps mortgage lenders, third-party service providers to assess strategic, operations, reputation, reporting and compliance risks that accompany sourcing of real estate mortgage settlement services. The firm also provides administrative and copywriting services to businesses and nonprofits. Jeff is the editor of the Mortgage Third Party Risk Blog, and the former executive director of the Title Appraisal Vendor Management Association.
Tony Pistilli is the Chief Residential Appraiser at U.S. Bank in Minneapolis. His responsibilities include the development of valuation products, policies and procedures for the residential lending process. Tony has been involved in the real estate appraising and lending industries for over 25 years. Prior to joining U.S. Bank he was president of Park Appraisal Service and has worked at several mortgage companies and the Department of Housing and Urban Development.
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