Have you ever wondered about the origin of Appraisal Management Companies (AMCs) reviewing appraisal reports before sending them on to clients?
Much of the current day rhetoric about AMCs and "review appraisals" revolves around a contention that a "review of an appraisal report" and a "review appraisal" are one in the same thing. Comments in the blogosphere and relevant sections of some states' AMC registration acts suggest that they may be one in the same. But it wasn't always this way. I should know: I was the first ever AMC review department manager on the face of the earth.
In the early 1980s, Cameron-Brown Co., a mortgage arm of North Carolina-based First Union, hired my employer to handle their appraisal fee panel management. Soon after, others like Lomas and Nettleton and Miles Homes came on board with similar requests for help managing their settlement service supply chains. The mainstream mortgage finance sector was the dream of both of the original AMCs; up until then their primary clients were consumer finance companies. This was a whole new field of play. Naturally my employer wanted to avoid any misstep that could jeopardize this important client group.
Like most clients, then as now, Cameron-Brown appraisal orders included special instructions: contact borrower today for an appointment tomorrow; call borrower at their office; verify this or that; need a super-rush. Stuff like that. These special instructions were duly passed on to the appraiser or their secretary when the order was placed. Some instructions were routine; others not so. "Is there a fire hydrant within 200 feet of the subject property?" is an example of the latter.
For Cameron-Brown, each appraisal was to include three sets each of the appraisal report and color photos (front, rear, street scene). What happened though was that, no matter how many appraisers complied, no one seemed to notice. That's because both client and AMC honchos were too busy banging on those in the trenches who dared drop a ball and when an appraisal showed up sans the right number of original hard copies and/or Polaroids.
Clients then as now value the idea of having only "one throat to choke," using IT-industry vernacular. So when agreed-to delivery conditions weren't met the client got on the horn to the SVP of AMC operations, to demand to know just how hard can it be to follow simple instructions. The SVP laid the same happiness on the VP of operations, who brought down pain on the regional manager, who passed it on to the supervisor, who called out the area representative, who contacted the appraiser to expedite the missing pulp and chromium, neatly stapled.
Who knew that technology would come along to automate these and the many other special instructions?
To fix the problem in a proactive relationship-maintaining way my employer set up a review department of sorts. Rather than sending appraisals to Cameron-Brown, appraisers sent them to the mail room at our home office. There a mail room clerk tallied the number of hard copies and photos. If all were there, the hard copy was sent to the client via overnight courier; if not the area representative contacted the appraiser to lay on the wood and secure the missing documents. The system worked well, until growing order volume and expanding list of special things to look for in the review complicated matters. That's because with each new (centralized) lender came a host of new special instructions.
Equally impactive on the process was that the scope of the review function morphed over time to include checking appraisals for completeness, internal consistency, comments on say excessive gross, net, and-or line item adjustments, signs of needed repairs seen in the photos, etc. The AMC became the last set of eyes, the last quality review, before the appraisal reached the underwriter’s cubicle. This pre-delivery "scrub" as it was often called, reduced underwriter addendum requests, delays in loan approvals, and marks against my employer for noncompliance with special instructions. It also provided my employer and later on other AMCs with a value-added service that could be marketed to other clients.
As the department grew, I was tapped to run this value-adding department; thus becoming the world’s first ever AMC review department manager!
(waiting for applause to die down)
Today, I might have to be a certified appraiser to do that job. What's happened is that the descriptions some AMCs use to describe their pre-delivery reviews have drawn heat from appraisers who say the activities constitute USPAP Standard 3 review appraisals. I've seen some of the offending descriptions, and advise every AMC to periodically review their marketing materials, and pre-delivery scrubs, to clearly and accurately represent to the client what is and isn’t being done. Myself, I'd avoid even linking the terms "review" and "appraisal" (as in a "review of the appraisal").
At the same time, I think AMCs -- like any client that buys a good or service from someone else -- should be allowed to ask the appraiser for additional comments, to consider additional, appropriate property information, provide further detail, substantiation or explanation for the value conclusion, or to correct errors in the appraisal report. A number of states seem to support this view by enacting appraiser independence laws that expressly permit lenders, mortgage bankers or mortgage brokers to ask the appraiser for such information, detail, substantiation or explanation, and/or error correction within the appraisal report. AMCs -- lest we forget -- are clients too, and as such, should have this same right even though they're not explicitly mentioned in a state’s appraiser independence statute.
I'm not prepared to engage in back and forths about what does or doesn't, should or shouldn't, might or mightn't constitute a Standard 3 review appraisal. So let's not. That's for state regulators to decide. Here, I'm simply stating that: 1) In its infancy the review of an appraisal report sought to verify that the quantity of photos and hard copies met a client's special instructions; 2) Over time the review of the appraisal report expanded to check for things like internal consistency, quantity and quality of comments, gross-net-line-item adjustments and such (what the ASB would later define as administrative vs. technical reviews – which I thought was a pretty good idea and demarcation line); and 3) Came to be regarded by some, with the help of a few examples of AMCs' marketing materials, as a review appraisal.
If state AMC oversight boards seek to expand the definition to include most every glance at and commentary on an appraisal to be a review appraisal they need to state that clearly to dispel any misinterpretation. Otherwise, some will and some won't view the most mundane clerical act, like looking to see if there are three sets of original photos for instance, as constituting a review appraisal, and as such requiring it be done by a certified or licensed appraiser. AMC registration acts I've seen so far have not been too clear on the matter. They need to do better.
Meaningful regulation ensures compliance of the industry's product development efforts to consistent and reasoned standards and guidelines; regulatory clarity encourages innovation.
Deeming the counting of photos and hard copies to be a "review appraisal" will throttle innovation. And to the extent that innovation + productivity = competitiveness that can’t be good. Clarity encourages innovation… and compliance.
Jeff Schurman is the executive director of the Title Appraisal Vendor Management Association (TAVMA), the trade association of the real estate settlement services vendor management industry. He is also an independent consultant and founder of Schurman Research Company, a leadership and business development advisory service.