Appraisal Management Companies
Newspaper of Saratoga County
By Peter Miller
Home mortgage interest rates have been at historic lows for several weeks, and lenders are doing a brisk business in refinance loans. In fact, in August, refinancing accounted for approximately 83 percent of all mortgage loans written. Home sales continue to slump, and purchase mortgages are only a small portion of the mortgage business today. At these low interest rates, lenders are anxious to sell their new loans, typically to Fannie Mae or Freddie Mac, to enable them to continue making more loans. Following the sub-prime mortgage meltdown of two years ago, the federal government has tightened the parameters within which these two agencies can operate. The new regulations affect the requirements for credit scores, homeowners’ and title insurance, acceptable debt-to-income ratios, appraisals, documentation, and more.
After the housing bubble burst and home prices began to decline, it became apparent that property appraisals no longer accurately reflectedactual value after a short time. As a result, most lenders now feel that an appraisal is valid for only six months maximum. That might havebeen good news for the firms that provide property appraisals, but the new regulations did not stop there.During that bubble, inflated selling prices sometimes caused lenders, buyers, sellers, or realtors, to pressure the appraiser to value a propertyat more than its worth in order to qualify for a large mortgage. In an effort to eliminate this pressure and provide greater independence forappraisers, the Home Valuation Code of Conduct (HVCC) was enacted in March 2008. One important facet of HVCC was to encourage lendersto outsource appraisals to appraisal management companies rather than order their own appraisals. In this way, the appraiser is not workingfor the lender, the borrower, or anyone involved in the sale.Since March 2008, the involvement of these management companies has grown from 15 percent of all appraisals to 80 percent. However,when these companies shop for a local appraiser for a particular property, they really shop – often offering to pay only a fraction of thetraditional cost. Needless to say, this has caused much alarm and dismay among appraisal firms.“The biggest change in the appraisal industry after the mortgage meltdown has been the HVCC legislation,” said Tony Mariotti of EmpireAppraisal Network. “It’s designed to separate the mortgage lenders from the appraisers via a third party. That third party is a managementcompany that shops for the cheapest appraiser, so they can maximize their own revenue. Some newer appraisers are getting an opportunity tolow-ball their way into the market without much experience here. They often come from outside the area, and they don’t know this market.”Mariotti feels that the implementation of HVCC is an overreaction to the close relationship that existed between some lenders and appraisers.In fact, there has been pressure on Congress to take immediate steps to “restore customary and reasonable fees” to real estate appraisals,claiming that the current system is not a free-market approach. It has seriously cut into the revenues of a number of appraisal firms withinand outside our region.
“My partners, Ron Murphy and Dan Munn, and I have been diversifying to offset the loss of revenue last year,” said Mariotti. “We recentlypurchased two prominent buildings in Ballston Spa to provide another income stream and give us better control over our business. However,with interest rates so low, we’re very busy again. We cover the whole state of New York.”After the slide in home values over the past two years, there is one element in the appraisal process that has grown increasingly troublesome.It is finding recent sales of comparable properties, or comps. “Often, in trying to find comparables,” said Mariotti, “you are forced to look atsales over the past year or so – what I consider the very bottom of the market slide. And those selling prices will affect the appraised value of acurrent sale.”
David Fontana, owner of Armstrong Appraisals LLC, said the recent changes in legislation governing appraisals are literally forcing dozens oflocal appraisers and hundreds across the country out of business. “Going through third party management companies, appraisers are nowbeing asked to perform appraisals at one-half the price they would previously have charged,” said Fontana. He feels it is an unsustainablesituation.
The appraised values of homes have gone down throughout most of New York state, according to Fontana, but not simply because sellingprices are lower. Market time also affects appraised value. A house that used to sell in two or three months now may take six to nine months.And because houses stay on the market longer, there are more houses on the market at any given time. Foreclosures also play a bigger role indetermining the value of a property. Short sales now total at least one out of every ten sales in this region, and those lower prices affect thevalue of the homes in that area. This is all considered in an appraisal.
Fontana explained, “While the volume of home sales has eroded, there are more foreclosures and refinances today, so there are moreopportunities for appraisers. Work also comes from divorce attorneys and estate attorneys. And for full-service appraisers like me, thecommercial market is pretty stable. While a residential appraisal might take two or three hours, a commercial procedure might require 30 or40 hours. The complexity is greater and so are the fees.”
Rick Ley, owner of Advanced Appraisals LLC, said that he sees fewer appraisals today due both to the end of the housing bubble and to theHVCC regulation. Regarding the reduction in fees caused by the intervention of management companies, Ley was hopeful. “The President hasjust signed legislation that will take effect within 90 days that will require these management companies to pay a ‘fair fee’ for appraisalservices. Independent surveys will determine what constitutes a fair fee.”
“Home values are starting to increase,” said Ley, “and the low mortgage interest rates have boosted refinancing activity. That means morebusiness for our firm. But we still receive calls from management companies asking if we’ll do an appraisal for a fraction of our normal rate,and we say, ‘Absolutely not.’” Fortunately, that situation should end soon with the new legislation. Advanced Appraisals provides residentialand commercial appraisals throughout the Capital Region and Glens Falls.
Although real estate sales, interest rates, and foreclosure activity are all somewhat volatile today, an appraisal is still the best way to get arealistic report on the fair market value of your residential or commercial property. And one of these trained, experienced appraisers can giveyou an objective look at how your property stacks up.