Weakened state budgets and inaction from federal agencies left questionable practices from large appraisal management companies without proper oversight, according to a report from the Government Accountability Office.
The wider use of AMCs since the housing crash resulted from new rules requiring arms-length valuations and prohibited contact with interested parties in the deal. But industry officials said there is not enough oversight over these firms to assure valuations are done correctly, according to the GAO report released Thursday before a House subcommittee.
"Some industry participants voiced concerns that some AMCs may prioritize low costs and speed over quality and competence," said William Shear, director of financial markets at the GAO. "For example, appraiser groups said that some AMCs selected appraisers based on who would accept the lowest fee and complete the appraisal report the fastest rather than on who was the most qualified, had the appropriate experience, and was familiar with the relevant neighborhood."
The Dodd-Frank Act required state appraiser licensing boards to supervise the AMCs and ordered federal banking regulators to establish minimum standards to license these firms. There has yet been issued no such standards.
Many state appraiser boards do not have the resources to effectively license AMCs or follow up on complaints filed against them, Donald Rogers, president of the Association of Appraisal Regulatory Officials, in testimony before the subcommittee.
"Boards have limited ability to oversee the functions of an AMC unless there is evidence of a violation of appraiser independence," Rogers said. "When complaints are received, it will likely be difficult for agencies with limited funds and personnel to investigate corporations that usually are not domiciled within their state."
For instance, there are 144 AMCs registered in North Carolina but only six are headquartered in the state.
Rogers also said his group learned that some AMCs were set up by former mortgage brokers and appraisers sanctioned or had licenses revoked in the past.
"There were no laws or regulations in place that prohibited these individuals or those with criminal backgrounds from setting up and managing these companies, even as they became such an integral part of the mortgage process," Rogers said.
AMCs and the appraisers forced to work for them have long been at odds since the new regulations gave rise to the use of the companies. Sara Stephens, president of the Appraisal Institute, a professional association of appraisers, said many AMCs are owned by the banks themselves and charged many for ignoring federal regulations by using price and turnaround time for hiring an appraiser.
"Yet, bank regulatory agencies appear understaffed to enforce this provision, helping to enable substandard appraisal procurement by banks," Stephens said.
Don Kelly testified on behalf of the Coalition to Facilitate Appraisal Integrity Reform, a group made of the five largest AMCs. He said the companies work as a single-point of contact for the lender and use many variables when deciding when to hire an appraiser.
"AMCs recruit and qualify vendors for their networks, by verifying appraisal licensure and/or certification, checking references, performing background checks, performing examinations, and auditing work samples," Kelly said. "This selection is based on a number of factors, including the appraiser's geographic proximity to the subject property, and performance metrics such as the quality of an appraiser's work."
Stephens pointed out many appraisers are not compensated fairly for an increasing amount of work, as mandated by regulation. In many cases, some appraisers are being paid half what they were when operating on their own. And the recent failure of AppraisaLoft shows how one unsupervised firm could cost many appraisers for contracts already fulfilled.
Park said the ASC registry contains fewer than 105,000 appraiser credentials, down 14% from the peak in 2007.
National groups such as the Mortgage Bankers Association and the National Association of Realtors submitted statement Thursday requesting uniformed standards that both assure the quality of the valuations and provide an easy-to-follow set of guidelines lenders can rely on.
According to the GAO report, the federal government has failed to do this for AMCs.
"Federal regulators and the (government-sponsored enterprises) said they hold lenders responsible for ensuring that AMCs' policies and practices meet their requirements but that they generally do not directly examine AMCs' operations," according to the report.