A brief scan of the mainstream media, real estate trade, or social media leads informed readers to the same conclusion: Appraisal management companies (AMCs) are not held in high esteem by many suppliers of the appraisal services that AMCs need to survive. Many appraisers believe AMCs either don't realize or don't care that the now over 30-year-old AMC industry is threatening the appraisal industry. Or at least it is blamed for many of the appraisal industry's woes.
AMCs hold on to virtually every fee panel management tenet the industry's founders adopted so many years ago. Two of these tenets, which are intimately related, stand out. One generally held belief is that if the AMC doesn't provide mortgage lenders cheap appraisals delivered fast, the other guy will. The other is that the AMC must demand discounted appraisal fees to keep client fees low.
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However, AMCs are inevitable in this age of advanced transaction management technology coupled with the nationalization and centralization of mortgage lending. Today, the top five mortgage lenders control over 70% of the market share. They do not want to be in the business of acquiring appraisals and, therefore, have made the strategic decision to outsource these functions to AMCs.
For their part, AMCs have done little over the years to overcome often scathingly negative portrayals of the industry and those who work with AMCs, by appraisers and others who object, even vehemently, to not only their business practices and ethics, but also their very existence.
Management consultant Peter Senge, in his seminal work ‘The Fifth Discipline’ – the authoritative text on systems thinking – says events that are distant in time and space are all connected within the same pattern, or system, with each event influencing the rest.
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Thus, for example, paying full fees removes the single-largest barrier to acceptance of AMCs as legitimate business partners. Thinking linearly, we'd be tempted to consider the claim by looking at the next step along a straight-line path. Yet the claim takes on additional, hopefully clearer meaning when thought of as a system of events.
Paying appraisers more – or less, for that matter – influences how appraisers perceive AMCs as business partners. In other words, if the AMC industry is perceived as paying appraisers retail fees, the popular perception of AMCs should be seen more favorably than today. By this logic, paying retail fees and tossing in, say, a $100 bonus should cause many in the appraisal industry to view the AMCs very favorably. Conversely, lowering fees from where they are today should have the exact opposite reaction among appraisers.
It should be noted that an increase in one event doesn't by necessity lead to an increase in the immediately following event. For example, if the starting-point event depicts, say, improved productivity due to automation of a process, the next event would not necessarily reflect an increase as well. In fact, it would likely be the opposite: Increased productivity would lead to lower overall cost (a reduction rather than an increase due to an increase in the preceding event).
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Paying full fees removes the single-largest barrier to acceptance of AMCs as legitimate business partners. At an April 2009 meeting with representatives of the Title Appraisal Vendor Management Association, a former Appraisal Institute president observed that paying appraisers their full fees would remove 95% of the appraisal industry's problems with AMCs. To the extent this is true, the AMC industry would benefit by paying appraisers their full fees.
In a 2010 poll of designated appraisers, nearly 50% rated their relationships with AMCs as unsatisfactory, due in large part to the fees along with the demands AMCs put on appraisers. AMC fees – low fees, specifically – are at the top of appraisers' list of grievances against AMCs. The cumulative effect of such negative perceptions is to harm the AMC brand and limit the industry's growth.
This single change would go a long way in resolving a public relationship dilemma that has dogged the AMC industry for, in some cases, almost a half-century. AMCs can start by standing up to clients pushing for ever-lower service fees. They need to explain that although AMC transaction management fees are negotiable, appraisal fees are not. Then hold the line.
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The starting point for renewal, in our view, is to pay appraisers their full-retail fees. Each of the other dozen or so categories of criticism of the AMC model will seem more tolerable and perhaps even acceptable absent the fee issue. Other issues will fade away or go away as AMCs leverage their retail fee model to place more of the quality control and customer service burden where it belongs – on appraisers.
We envision a future in which the former factions come together to educate another industry undergoing a renewal period of its own – the mortgage lending industry – as to why appraisers in partnership with AMCs ought to be valued advisors rather than necessary inconveniences, and as to why they're a superior solution than automated valuation models and other low-end evaluation tools.
And why not? AMCs, as inevitable as they are to the mortgage lending ecosystem, will be of no value to anyone if the appraisals they supply to lenders become passe.
Jeff Schurman is the executive director of Wexford, Pa.-based Leading Causes LLC and former executive director of the Title Appraisal Vendor Management Association. He can be reached at jeff@leadingcauses.com. Rick Grant is the president and CEO of RGA Public Relations, based in Jim Thorpe, Pa. He can be reached at rick.grant@rga-pr.com. This article is adapted and edited from their white paper entitled ‘The Appraisal Management Company Full-Fee Hypothesis.’