Between all the fees, regulations, and paperwork involved, obtaining a mortgage in order to purchase a new home is often an obtuse and frustrating process. Besides a good credit history, starting capital, and proof of sustainable income, the lending institution requires an appraisal of the property to be purchased, in order to verify the value of the mortgaged property. In the past, potential buyers or banks simply hired an appraiser to do the job. Currently, federal guidelines require banks to procure an appraisal through an appraisal management company, rather than directly hire an appraisal.
For the average buyer, unfamiliar with the mortgage process, this seems like an unnecessary requirement. To truly understand the purpose of an appraisal management company, a little bit of history about the banking industry is needed.
For decades, appraisals were commissioned directly from appraisers with absolutely no oversight. The lending institution considering the mortgage would provide an appraiser with the location of the property to be appraised and with the value the lending institution was seeking to have the property appraised at. If the appraiser provided an appraisal with any other value, the lending institution was certain to blacklist the appraiser from future appraisers and then hire a new appraiser who would comply with the lending institution’s requested value.
The lack of oversight meant that the livelihood of appraisers was entirely at the mercy of lenders. In addition, because lending institutions were dictating the values of properties, and thus the amount that would be lent on the properties, many properties were being significantly overvalued and loans were being made that, in a true free market, did not have enough collateral to actually support the loan. As long as the housing market was doing well, the flaws were not apparent, but when the housing market began to plummet, lending institutions began to suffer billions of dollars of loss.
In May 2009, after the housing market crashed, federal laws changed to require oversight between lending institutions and appraisers. Any mortgage sponsored by Fannie Mae or Freddie Mac, which account for the vast majority of all mortgages, required an appraisal to be procured through an appraisal management company. Appraisal management companies had previously existed for decades, but this law was the first time that the companies were a required part of the process.
Appraisal management companies (AMC) exist for a specific purpose. An appraisal management company provides an appraisal from an independent appraiser that strictly follows all USPAP (Uniform Standards of Professional Appraisals Practices) guidelines. In order to provide an appraisal, an AMC maintains a pool of qualified appraisers.
When an appraisal request comes from a lending institution, an appraiser that is experienced in the area of the requested appraiser is assigned provide an appraisal report. The appraiser is provided contact information for the property in order to schedule an inspection, but is never provided any indication of property value. The appraiser is expected to provide an appraisal report, based on USPAP guidelines. If the appraiser encounters any difficulties, the AMC provides assistance, but at no time is the appraiser permitted to communicate directly with the lending institution or vice versa.
When the report is submitted, a quality assurance team at the AMC combs through the appraisal report and confirms that all values on the report and comparable properties used to determine the value conform to USPAP guidelines. The quality assurance team usually does not include actual appraisers, but is highly trained and has access to professional in-house appraisers who can assist in difficult situations. If proper procedures were followed by the appraiser, the value is never questioned. If improper procedures were used, the appraiser is required to resubmit the report with corrections.
When the report eventually passes through quality assurance, it is provided to the lending institution. The report provided must be used by the lending institution unless the lending institution can prove inadequacy of the report or impropriety on the part of the appraiser. Federal guidelines prevent a lending institution from obtaining multiple appraisal reports and using the most favorable.
The mandate of every AMC is to provide accurate and independent appraisal reports. This benefit does not come without cost. An appraisal report commissioned through an AMC generally costs about 50% more than an appraisal report commissioned directly from an appraiser. Also, appraisal reports usually take 1-2 additional days to be delivered to the lending institution when working with an AMC. The extra cost needs to be paid by the potential borrower and the extra time can interfere with obtaining premium interest rates.
Federal law currently requires an AMC to be involved in a vast majority of the mortgages available, so the additional costs need to be accounted for when applying for a mortgage. The increased monetary cost is only about $100 – $200 in most cases, which is rather inconsequential compared to the cost of purchasing a home. The potential to lose a prime rate is much more significant and cast cost thousands or even tens of thousands of dollars over the life of a mortgage. Regardless, an accurate and unbiased appraisal report is so essential to the security of a mortgage that both lending institutions and borrowers are better off when an AMC is involved, than when one isn’t.