I appreciate Appraisal Buzz giving me the opportunity to weigh in on the recent FHFA working paper regarding the ‘findings’ on AMC managed and non-AMC managed appraisal assignments. The authors go to some care to describe this exercise as a working paper to promote thought and debate – and then title it Stylized Facts from AMC and non-AMC Appraisals.
I wasn’t familiar with the term, so I looked it up. Here are two definitions. (1) “In social sciences, especially economics, a stylized fact is a simplified presentation of an empirical finding. While results in statistics can only be shown to be highly probable, in a stylized fact, they are presented as true. They are a means to represent complicated statistical findings in an easy way. A stylized fact is often a broad generalization, which although essentially true may have inaccuracies in the detail.” (Wikipedia). (2) Stylized facts are observations that have been made in so many contexts that they are widely understood to be empirical truths, to which theories must fit. Used especially in macroeconomic theory. Considered unhelpful in economic history where context is central.” (About.com) … I added the underlines. And for the authors original disassociation with their conclusions as representing the FHFA’s policy or perspective; labeling conclusions as ‘facts’ and affixing the FHFA logo to the study gives an entirely different impression to readers.
Reading this paper is a reminder of the power of language. The authors (and they’re not alone in this regard) use terms like overvaluation and super overvaluation to essentially denigrate an appraiser’s opinion of value because it doesn’t agree with the contract price in a transaction while at the same time posturing that a high percentage of appraisals that support the contract represent conformational bias. By the way, the term overvaluation apparently reflects a statistical difference of up to 5% greater than a contract price. Parenthetically, 5% is generally considered the gold standard in the appraisal industry when comparing two qualified appraisers addressing the same assignment. Far better ways to delineate the difference in value conclusions than using terms that basically gas-light a discussion and adds little to understanding the underlying issues. But it gets worse.
This paper references and piggy-backs on a paper done by an economist at the Philadelphia Federal Reserve. I was present to hear this economist speak on his work at an industry conference in South Carolina recently. One of the fundamental premises is that “low appraisals are killing deals”. This is 2018 – and one would hope that those who purport to understand an industry that they pontificate about would possess a basic understanding of it. There are no ‘low appraisals’. There are any number of appraisals that don’t support the contract price. Why … how? Because they represent that appraiser’s opinion of value. That doesn’t make them ‘low’ – or wrong. There is nothing sacrosanct about a contract price in terms of value. It may reflect what certain parties believe a property is worth, but that may not, upon considered review, constitute value. Just go ask the folks in Secondary at any lender how comfortable they’d be at predicating their loans based on the concept that a contract price is an accurate representation of a property’s worth versus an independent assessment of a property’s value by someone with no interest in the (financial) outcome of a transaction. Yet these assumptions (i.e., ‘facts’) are what become the very foundations that their conclusions are built upon.
But let me finish by honoring the author’s request to stimulate questioning (I already weighed in with the critical commentary piece) with the following:
– Statement: AMCs “typically charge lenders about the same amount that independent fee appraisers would charge lenders when working with them directly” and absorb at least 30 percent of this fee. (my emphasis)
Response: Many AMCs charge less than 30% – have you analyzed their outcomes to see if their results are different?
– Statement: If AMCs serve successfully as firewalls, they should be able to correct the established appraisal confirmation bias and lower the degree of overvaluation.
Response: This argument suggests that the role of the appraiser is to validate contract prices. This is precisely not the role of an appraiser. Example: just this week an appraisal came in $90,000 under the sales contract, effectively ‘killing the deal’ per the lender. As I penned a detailed explanation of ‘why’ back to the lender, their very own internal process supported the appraiser’s same opinion of value. Was that a ‘low’ appraisal? Did it ‘kill a deal’ – or did it protect the buyer, the lender and the community from overpaying?
– Statement: The paper notes “scant evidence of any systematic quality differences between appraisals associated and unassociated with AMCs.”
Response: Given that, as a control group, you utilize the same subset of appraisers (with a minimum of 20 AMC and non-AMC assignments) and yet see little difference between the two channels. Why would you expect there to be a notable difference in conclusions? Wouldn’t one expect those biases to be vendor-provider (appraiser) specific rather than process (AMC or non-AMC) specific? This might also help ‘explain’ the consistency in ‘mistakes’ you chart.
– Statement: AMCs set unrealistic deadlines and AMCs set the fees.
Response: Neither of those statements are accurate in my experience. Lenders establish assignment deadlines as part of their SLA and also ultimately determine the fee structure. What the better AMCs have done is to help communicate what is (and what should be) a customary and reasonable fee range. The customary and reasonable fee is what an appraiser should receive, and the AMC fee should essentially be on top of that fee. The AMC portion of the fee charged the lender (or more accurately the borrower in most cases) is for the services the AMC provides the lender and should not constitute a reduction to the customary and reasonable fee that the appraiser is properly entitled to receive for their efforts.
I think this only begins to touch on many of the issues raised here. I’d lobby for better diversity in the data sources, more rigor in the analysis, more primary research (i.e. speak with both appraisers and AMCs before making blanket assumptions) and a better understanding of the terms employed – and a humble recognition that our non-conforming collateral universe may be about to experience another tectonic shift if we’re indeed rising out of a low rate environment. In fact, maybe start with an industry wide query as to what questions we should all be asking.
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