[u]REQUIRED READING:[/u][/i] Looking back on the roots of the mortgage crisis, it is clear that there were many moving parts and contributory factors that led to the collapse of the industry; blaming any single business segment is far too simplistic[/b]. That said, when you boil the whole thing down, it is now clear that lenders should have stuck to the traditional "Three C's" of credit, capacity and collateral that guided the business for generations. Among the many issues that stand out during the extraordinary events of the past few years is the recognition that the importance of collateral is unchanging. In the final analysis, nothing is as important as knowing that the property valuation is correct, complete and professionally executed. Quite simply, if the value is there, everything else tends to take care of itself – but when you take away the collateral part of the formula's stability, nothing else really works. Credit can be massaged to a point where default risk meets add-on yield reward, and debt-to-income can be managed with enough explanation and compensating factors. But if the value isn't there, you don't really have a mortgage loan – you have an unsecured transaction. Appraisal management companies (AMCs) have been around for a long time, but they became more prominent when the Home Valuation Code of Conduct (HVCC) rules were adopted by the government-sponsored enterprises. These rules were intended to provide a bumper between loan origination people – mainly, commissioned loan officers – and appraisers in order to avoid undue influence on valuations. Needless to say, the outcome deviated somewhat from the original plans. Loan officers have been pressuring appraisers for years to a mostly lesser degree, but at some point, housing values were tangibly affected to the detriment of the industry, resulting in the creation of the HVCC. The rules might have been a good idea, but they led to some serious problems in getting accurate and timely appraisals. As a result, originators' complaints of poor quality, incompleteness and generally sloppy work from appraisers began to become more commonplace. One of the reasons this seemed to be happening was due to the largely manual nature of many appraisal management companies: They are staffed with people who perform clerical and repetitive tasks that other companies are doing with automated technology. These AMCs have to charge a significant fee to make money – and that fee often amounts to as much as 50% of an appraisal charge. This leaves only about 50% available to pay the appraiser, but the more experienced and established the appraisers are, the less likely they are to accept those amounts. As a result, the low-tech AMC finds itself picking appraisers based on price rather than experience, which often leads to finding appraisers who will drive long distances to perform paying work. In contrast, the next-generation AMC would use human talent to perform expert review and augment the technology when necessary. [b][i]Flash the cash[/i][/b] Under HVCC, Federal Housing Administration (FHA)-approved appraisers are required for collateral valuation, and they must be paid their specified reasonable and customary fees for their reports. This is designed to eliminate appraisers being low-balled on fees, but some AMCs have been known to offer low fees that they consider "reasonable and customary" for FHA work; appraisers must either take it or leave it. This could create significant problems for appraisers, particularly if AMCs push the fee issue to a breaking point in the name of profitability. It's not the FHA's intention that appraisers be forced to take below-market compensation, especially if "the market" is defined by AMCs primarily fixated on bottom-line concerns. The FHA is interested in quality and will listen to its approved appraisers if they call "foul!" for being squeezed by the middlemen controlling their orders. The FHA may well provide some additional guidance on this as appraiser complaints mount. The FHA also requires appraisers to be thoroughly familiar with the area being appraised, so importing those with limited geographic competency – something that happened frequently under HVCC – is no longer allowed. In addition, AMC fees appear on a separate line on the HUD-1 and must be justifiable for the work performed. Even though HUD says it is not requiring AMCs to separate their fees, this has become the end result. The whole FHA situation has the potential to substantially change the AMC business. Either an AMC charges a lower fee by being more efficient, or they succeed in charging a larger amount, in addition to paying the required full fees to appraisers. Thus, an FHA appraisal will either cost a little more than the appraiser's fee – with a minimal added-on management fee – or the price will be a lot more to the consumer than the appraiser's fee alone, with a greater AMC fee adding very significantly to the borrower's cost. That scenario will pose an obvious marketing challenge to AMCs operating this way, and it seems logical that many of them will be forced out of FHA lending, if not out of business entirely. Most next-generation AMCs are already assuring FHA compliance with fees and charges. They are also designed to be flexible in appraiser selection, making their own approved panels available, allowing lenders to use their own or employing a combination of both. Importantly, lenders can still receive the analytics and metrics they need to stay on top of their valuation trends. Would these innovations in appraisal management have helped ease the pain of the mortgage meltdown if they were available before the bubble burst? The answer is an unequivocal yes, because the volume running through many companies was so great that the technology would have been right at home keeping tabs on the appraisals coming through the pipeline – whether retail, wholesale or correspondent. The legendary actress Tallulah Bankhead once said, "If I had to live my life again, I'd make all the same mistakes – only sooner." Hopefully now, with some highly effective tools in place to shore up the valuation side of the business, the industry will not be making many of the same mistakes again – either sooner, or later. [i]Griff Straw is president of Solidifi U.S. Inc., based in Chicago. He is a former executive with Freddie Mac, United Guaranty and MGIC, and is a member of the Mortgage Bankers Association's master faculty. He can be reached at (866) 781-01
