Value judgments. (Cover Report: Settlement Services).

All kinds of changes are occurring in the appraisal business as independent appraisers face prospects of a move to bundling of settlement services. Appraisal management companies are gaining importance. Automated valuation models (AVMs), too, are gaining new ground.

ARE TRADITIONAL

REAL ESTATE APPRAISERS A VANISHING BREED? Appraisers today are faced with a number of challenges, not the least of which are the Department of Housing and Urban Development's (HUD's) proposed changes to the Real Estate Settlement Procedures Act (RE SPA) regarding guaranteed mortgage packages. $$$ Under the proposed RE SPA reform (which as of this writing had not been issued in final form), mortgage packagers would offer potential borrowers a lump-sum price for settlement costs, including the cost of appraisals. That will likely mean a big change in the way most appraisers do business: If lenders are guaranteeing a price to borrowers, establishing volume contracts with appraisal management companies (AMCs) or vendor management companies (VMCs) likely will become the order of the day. $$$ Appraisers who have made their living based on strong one-on-one relationships with mortgage brokers and loan officers may now find it necessary to align with vendor management companies, sources interviewed say. $$$ The appraisal industry is "in a paradigm shift," sa ys Stan Banton, chairman and founder of Banton Technologies, Huntsville, Alabama, a collateral assessment firm. "We're moving away from personal service, where individual appraisers have relationships with individual loan originators, toward all of the services being handled out of central locations," Banton says.

"If I were a classic appraiser, I would be very concerned--because you've either got to ally yourself with [appraisal management companies], probably at a significantly lower price with a lot less control, or you probably won't survive. We're simply looking at the way the world is moving. I don't think anybody can stop it," he says.

Increasing automation of collateral assessment and changes in the types of appraisals lenders order--from full property appraisals to less-extensive assessments--are also changing the world for traditional appraisers. RESPA reform and mortgage bundling will accelerate the change, sources agree.

The guaranteed mortgage package concept "is almost going to force the lenders to centralize the sourcing and management of the vendors," says Patrick McElhaney, president and chief executive officer of GreenLink LLC, Jacksonville, Florida. GreenLink is a vendor management company and a wholly owned subsidiary of Wachovia Corporation, Charlotte, North Carolina, "If every mortgage application is handled by the local loan officer, how can you guarantee the price? There's going to have to be larger contractual relationships established," McElhaney says.

"The settlement service providers are nervous," agrees Neil Olson, chief strategic officer with FNC Inc., Costa Mesa, California. "They feel as though they've had one way of doing business, they've been doing a good job, and this kind of changes all the rules. Now you have to find a package to live in," he says.

Many in the appraisal industry, including the Chicago-based Appraisal Institute[TM], are opposed to including the appraisal in the guaranteed package quote, believing it will place small, local appraisers at a great disadvantage and could eventually drive them out of business.

"One of the biggest areas of concern is the proposed rule basically creates an exemption to the antikickback [Section 8 of RE SPA], says Alan E. Hummel, president of the Appraisal Institute, "That is a cause of great concern to our members--that their services and what they charge for their services may put them at a competitive disadvantage, especially if they're competing with large banks that are looking for large national services." The RESPA proposed rule allows for an exemption from RESPA's antikickback provision as long as the lender provides the package of settlement services at the guaranteed price to the borrower. If lenders opt not to offer the guaranteed mortgage package, then the exemption would not apply.

Accountability for appraisal services under RESPA reform is a key issue for the American Guild of Appraisers (AGA), Cherry Hill, New Jersey, says William Sentner, AGA's president and a licensed appraiser in Cherry Hill, The AGA is a professional guild affiliated with the Office of Professional Employees International Union (OPEIU), New York, and the American Federation of Labor--Congress of Industrial Organizations (AFL-CIO), Washington, D.C.

"Under bundling, there's absolutely no accountability. A lender can tell a consumer the settlement costs are $3,000, then they squeeze the title company and the appraiser, pay only $2,000 and make $1,000 on the settlement," Sentner claims.

Yet market pressures are expected to keep lenders from engaging in price padding if they want to remain competitive with what other lenders are charging when borrowers shop around.

The proposed changes to RESPA will have a significant impact on "any independent appraiser who is not affiliated with some sort of network, because it will be far more difficult to get business on their own," says Mark Yellen, president and chief executive officer of Appraisalcom, Buffalo, New York. Appraisalcom is one of the largest providers of technology to real estate appraisers in the country, and represents about one-third of the independent appraisers in the country.

The advent of bundling may also prompt some good appraisers to leave the industry, says Sentner. "Now, who will do the appraisals? The bottom feeders--the appraisers who are new and don't have any experience and/or appraisers who are willing to come up with the values lenders want," he predicts.

Working with VMCs: The good, the bad and the fee split

Indeed, not all appraisers are eager to change the way they do business from working directly with loan originators to going through what they view as a middleman.

If RESPA reform goes forward and the trend to package mortgage services continues to accelerate, "It will pretty much mandate that all appraisers affiliate themselves with a large appraisal management company," says James Earp, an appraiser and owner of James Earp Appraisal Service, Apex, North Carolina. "More often than not, working with appraisal management companies cuts into your fees," he says.

Earp currently works with a few appraisal management companies, but gets the vast majority of his business through direct relationships with lenders and mortgage brokers. "I think it's better the way it is in the current market, where you have 15 or 20 brokers that you can work with, You get your business from a variety of places rather than have one very large source that could push you around, bully you or drop you at any time. The management companies can put pressure on you to do the work for less money or pressure you on valuations," Earp says.

"Appraisers, as a general rule, have never really liked AMCs, because AMCs often keep about 50 percent of the fee," says Ted Cincotti, chief appraiser with Appraisal com.

"The split varies depending on the agreement, but management companies have been criticized for taking too big a percentage. I think the fires of that criticism will be stoked a bit with RESPA reform, because it appears that a lot of that business will be passing through AMCs." Cincotti adds that Appraisal.com has a fundamentally different way of doing business than many other management companies, and that appraisers set their own fees and retain 90 percent of the fee.

Earp fears that RESPA reform, as proposed at press time, would encourage lenders and management companies to pressure appraisers to quote one price, or a price for each type of appraisal. "I'm not sure how that would work, but I am concerned that when big business gets involved, they're going to want a bigger piece of our pie," he says.

Not all appraisers are opposed to management companies. "As long as the fees are still parsed out and paid in a timely manner, I don't think [working with management companies] is a problem," says Eric Klein, an appraiser with A. Klein Appraisals, Boston.

Currently about 20 percent to 25 percent of Klein Appraisals' business comes from management companies, with the remainder coming from a few large mortgage companies. So far, Klein is satisfied with the fees his company receives from management companies. "I adjust my fees for AMCs. If they take a 10 percent cut of the fee, I adjust my fee 10 percent higher, so I'm still making the same fee that I would without them. Also, mortgage brokers and lenders are making a lot of money on these loans, so an extra $10, 520, 530 or even $200 isn't a lot to them. If [the lender] has peace of mind that you're going to help close the loan on time, they're not going to nickel-and-dime us," he says.

Appraisal management companies "still have to have the appraisers," Klein says. "They need to have the relationships with us; it doesn't matter how many orders they get if they don't have the appraisers to do the work. So as long as we have good relationships with those types of companies, and our fees are paid, we'll be OK."

But relationships nurtured with lenders or brokers over many years may no longer be as fruitful as packaging becomes more prevalent, sources say.

"Real estate lending has always been a relationship business," says FNC's Olson. "How do I pick my title, appraisal, escrow people? Prices are basically the same, so I base it on relationships. Appraisers have been trained for the last 30 years to develop really strong relationships. Now with RESPA, my relationship with the lender has dissipated because it pushes me into a package."

If the packaging process causes the sourcing of mortgage services to be centralized, "from the appraisers' perspective they're going to be losing negotiating leverage," adds GreenLink's McElhaney.

But McElhaney points to a number of advantages in working with management companies. "While the appraiser may have a little bit less price leverage as a vendor, on the upside, you've got a very good and steady source of business because you become one of a fairly small universe of people that are eligible to get the orders. You can grow your business even though your margin may be a little smaller. All you have to do is add capacity and take on more orders. You don't have to do more marketing," he says.

GreenLink negotiates its fees with every vendor, McElhaney adds. "We do not attempt to set the fee, because we don't think that's our place," he says. In fact, the fee is not the most important factor to GreenLink when it selects its vendors. "We look at turnaround time, licensing, capacity--all of those things come before pricing. Of course, all those other things being equal, price counts too," McElhaney says.

Plano, Texas--based LandSafe Appraisal Services Inc., an appraisal management firm, has seen more interest from appraisers recently, according to Greg Dennis, president and chief operating officer. LandSafe Appraisal is part of LandSafe Inc., Plano, Texas, a provider of real estate and closing services, and a wholly owned subsidiary of Countrywide Financial Corporation, Calabasas, California. For appraisers looking for nationwide business, "It will be key to forge relationships with appraisal management companies," Dennis says.

The fees LandSafe negotiates with appraisers are "open-market arrangements," Dennis says. "We've got lots of appraisers who think our program is a very viable source of long-term business. Is it for every appraiser out there? No. There are a lot of appraisers who don't see the value [of] working with an AMC. With RES PA, I think the value proposition [of working with an AMC] is going to be strengthened because we're going to be conduits to relationships with title, credit and flood vendors that [appraisers] would have to go out and establish," Dennis says.

A big issue for appraisers is cash flow, Dennis adds. "We pay very promptly. The appraiser doesn't have to wait for the closing to get paid," he says.

But clearly, working with an appraisal management company as the sole source of business is not for everyone. "I don't think I would do it," says Earp. "I've been [an appraiser] for 11 years, and would go the route of working outside the mortgage business before I'd start cutting my fees and working with appraisal management companies. I feel like I've paid my dues and am not going to start cutting my fees and being jerked around."

And much will depend on which local market an appraiser works in, several sources point out.

"Each market is different," says McElhaney. "If you're in a major urban market, you may have to [work with AMCs]. If you're in Smalltown USA and there's a local lender--or two or three lenders--you just need to get yourself established as the vendor of choice with them and be part of their package. It doesn't necessarily mean [appraisers] have to do business with the huge companies. You're going to have to set your fees and so on, but it doesn't have to be a bad thing," McElhaney says.

Packaging concept not dependent on RESPA reform

Sources interviewed also agree that the trend for lenders to offer packaged or "bundled" mortgage services will continue, whether or not RESPA reform is adopted. "The packaging concept is not dependent on RESPA reform--it's not a regulatory issue," says McElhaney. "RESPA gives packaging some safe harbor from potential penalties that many people don't have the appetite or wherewithal to navigate. But you can package products today. There's nothing preventing you from doing so," McElhaney says.

RESPA reform, as currently proposed, will accelerate the trend of mortgage packaging, but "even if it [doesn't get adopted], you're going to see more bundling because it's got some legs in the consumer marketing world, and people are looking at it on its own merits regardless of the regulatory implications," McElhaney says. "Lenders that are already doing it have been reporting good results."

Poway, California--based eAppraiseIT LLC, one of the country's largest vendor management companies, has seen the number of its lender clients offering guaranteed mortgage packages grow substantially over the last nine or 10 months, according to Shawn McGowan, executive vice president and chief strategic officer.

"Some of our larger lending clients started positioning bundling initiatives that were originally in anticipation of the HUD regulation being implemented. Even when the question marks rose about the timing and whether the HUD regs would be revised, many of those entities are carrying forward with their bundling solutions anyway," McGowan says.

How will fee variance be treated by HUD?

The way HUD covers appraisal fee variance in its RESPA reform is a key issue, according to McGowan. "My guess is the final rule will likely allow some type of bundled solution that will allow third-party service providers to quote fees with clients, with an understanding that there will hopefully be some degree of flexibility," McGowan says.

Allowing for flexibility in appraisal fees is important because assignments often turn out to be much different than the appraiser expected, McGowan says.

"It is not uncommon at all for an appraiser to receive an assignment on what we're told is a single-family residence. We'll perform some research on that particular property before we ever go out to the field to inspect the home. We quote a fee for a single-family residence, but we get out there and it turns out to be a multifamily property. That means all the research work we did is for naught. A multifamily fee is probably more like $500, instead of $300 for a single-family home," McGowan says.

"It is our hope that there is a level of flexibility--the term used in the regulation is a variance--that will allow for those types of situations," he says.

RESPA reform and mortgage bundling will place a much greater onus on service providers to really understand the assignment at the time it is given, McGowan adds. "Today if we accept an assignment and find when we go out into the field that the property is something other than what we expected, we would call the client and get the added fee approved, and would move on to completing the assignment. That type of fee variability is going to be much, much harder depending on how RESPA reform plays out, especially if HUD takes the position of a zero variance," he says.

It would be difficult to give set fees for appraisals by type or even by location, because so many variables go into an appraisal, several sources say. "There's a huge variance in fees right now," says Appraisal.com's Cincotti. "Very broadly speaking, fees can range from $275 for a very typical single-family home up to $475 or more for more unusual properties."

And some appraisers fear that if bundling becomes the norm in the mortgage industry, there will be much more pressure to lower appraisal fees. "Today there's really no incentive to grind on the appraiser to lower the price," notes FNC's Olson. "Today nobody gets to keep it. Under the new rule, that all changes. If the lender can essentially shop closing services for price, they will," he says.

Olson adds, however, he doesn't believe lenders would try to drive the cost of appraisals down too much. "I don't think lenders are really going to be trying to make money off the appraisers. The flow of service is more important to them than cost. They know if they drive the cost down too far, they will lose out on service," he says.

How mortgage brokers fare in the world of bundling is a key issue for many appraisers. "More than half of the business appraisers do comes from brokers. And the question is, what are the brokers going to do?" says FNG's Olson.

If guaranteed mortgage packages become the order of the day, "brokers don't feel as though they have as much control. They're going to have to find somebody to align themselves with," Olson says. "The classic market position appraisers have with brokers may be jeopardized," he adds.

Working with brokers is appealing to appraisers because they tend to order more full appraisals than a retail lender would. "Brokers want to make [the loan] acceptable to as many people as possible. It's very common and very typical for brokers to order full appraisals, the more expensive ones. There'd be less reason for anyone to turn the loan down. But if you're a big lender, you already know what you're willing to accept," Olson says.

More emphasis on automation, less on relationships

And RESPA is just one of several factors changing the appraisal business. "The industry is in transition, and RESPA is just one of the planks of that transition," says LandSafe's Dennis. Technological advancements are another big factor, he says.

More and more lenders are becoming comfortable with automated valuation models (AVMs), reducing their demand for the traditional full appraisal, several sources say. Or lenders order appraisals requiring less work and due diligence on the part of the appraiser, which also means lower fees.

"My biggest fear is that eventually [the mortgage industry] will do away with appraisals altogether, putting the appraiser out of business," says Earp. He points to both automation of appraisal services as well as reduced appraisal requirements as contributing to the reduced need for full appraisals.

The type of appraisal lenders ask for has changed tremendously over the past several years, Earp says. "We've gone from almost 100 percent full appraisals--the URAR [Uniform Residential Appraisal Report] or 1004--five years ago to only 40 [percent] to 50 percent 10045 today. The rest are going to be just drive-by appraisals--the 2055s, 2065s, 2075s," Earp says.

The mortgage industry is "heading down a path where the AVMs are clearly being used by more and more companies. The acceptance is growing by the day. RESPA is just going to speed that process up," says Banton.

The appeal of AVMs is "purely dollars and cents," Banton says. "The AVM has brought a much more cost-effective solution to the table. It's $350 for a full appraisal versus $40 or $50 for an AVM, or maybe $75 or $100 for an [appraiser-assisted AVM]," he says.

The move to automated solutions obviously means less work for appraisers, Banton says. "The appraiser has to do three or four times the volume to maintain the same income level. I don't think most appraisers can do it. I see a strong indication that the appraisal industry is going to become much thinner than it is now," he says.

Will there still be a need for the traditional appraiser in the future? "Absolutely," says LandSafe's Dennis. "There's always the properties where you need rigorous due diligence--the large-dollar properties and loans in the subprime sector, for example," he says. "I think the role [of the traditional appraiser] is going to change to some of the niche assignments, and perhaps more of a consulting kind of role in tougher or more high-risk properties," Dennis says.

But AVMs work very well on typical properties in well-populated areas, Dennis says. "For the rank-and-file suburban property with a good borrower, the data models lend themselves very well to [appraising] those types of loans. In rural markets, where data is a little more scarce, the AVMs are a little less successful," he says.

The key is understanding where and when an AVM gives reliable results and when it doesn't, Dennis says. "At the end of the day, it's a risk-management decision among lenders and investor communities," he says.

Not everyone is pleased with the drive to automate appraisals. "The automated valuations have gone totally amok," says the American Guild of Appraisers' Sentner. "Automated valuations don't have eyes or ears. To get an accurate appraisal you have to have that," he says.

Sentner cites anecdotal evidence of AVMs showing high error rates. "I had an automated valuation of a house in New Jersey that came out to $187,000. The appraisal came out at $160,000. The one thing the automated valuation didn't show was that the house was between two gasoline tank farms," he says.

But there is an automated product that the American Guild of Appraisers has signed off on. Earlier this year it entered into a relationship with Mayfield Heights, Ohio-based Appraisal Management Co. (AMCO), a large appraisal management company. The American Guild of Appraisers and AMCO have agreed to promote the interest of independent appraisers, while also promoting safety and soundness in collateral valuations, Sentner says.

Sentner approves of AMCO's e Valu[TM] product, a hybrid property valuation product "that fills a gap between traditional appraisals and AVMs," according to AMCO's Web site. AMCO touts eValu as having a lower cost and faster turn time than the drive-by and full appraisals, as well as more coverage and more reliability than fully automated AVMs. The AMCO eValu can deliver a USPAP-approved (Uniform Standards of Professional Appraisal Practice) appraisal in fewer than two days for less than $100, says Patrick Moore, president of AMCO.

"It's an AVM supplemented by a local appraiser who does a desktop appraisal," says Moore. AMCO chooses appraisers who are familiar with the neighborhood of the property, and the appraiser has the right to upgrade to a full appraisal if it's deemed necessary. "We think it's a good answer to the way the industry is moving," he adds.

Credit scoring lessening need for full appraisals?

As lenders become more comfortable with the predictive value of credit scoring, many are seeing less of a need for full appraisals, sources interviewed say. "With the introduction of FICO[R] scoring, lenders have achieved a very good understanding of where their defaults are going to be. Once you get over a certain FICO score, defaults are rare and they're unpredictable," says FNC's Olson.

When a lender's general sense is that the borrower has good credit quality and the property is a low-risk, tract-type of house, "the amount of due diligence they spend establishing the value isn't as important," Olson says. "Spending 5300 instead of $200 doesn't give them a better answer. There's an appropriate amount of due diligence a lender can do on a property, but doing it more intensely on a relatively low-risk transaction doesn't really help the borrower or the [lender]," he says.

The less-extensive appraisals are not only cheaper, but turnaround time is faster, Olson notes. "It would not be unusual today for lending institutions to do only 5 percent of the 1004 [full] appraisal, and mostly the 2055. It's a less-extensive review of the property, with a little bit less due diligence," he says.

Banton agrees credit scoring has changed the lender's view of appraisals. "We were a collateral-based lending world 10 years ago. I think we're more of a credit-based industry now," Banton says.

"As long as the FICO is good, it's only additional evidence if you've got good collateral. In the past, everything was based on collateral," Banton says.

On the other hand, the appraisal becomes much more important if credit quality is an issue, Banton notes. "If somebody has a 550 FICO score, they're not going to use an AVM on that loan. They're going to use a real live appraiser and make darn sure that property appraisal is really clean, because that guy may go belly-up tomorrow," Banton says.

Often lenders may start off with an AVM, and if the property is in an area where the data isn't extensive enough, the lender can choose to order a more traditional appraisal, says LandSafe's Dennis. "Lenders are trying to carve off which loan programs, which loan-to-value [LTV] ratios and which FICO scores lend themselves to a less-rigorous collateral valuation-the automated valuation or some version thereof," he says.

Mortgage bundling also puts more distance between the local loan officer and the appraiser, "which isn't a bad thing from a collateral risk standpoint," notes McElhaney. "To the extent you centralize this stuff and it goes through a vendor management operation, loan officers won't be dealing directly with the appraiser anymore," he says.

McElhaney points to a recent survey performed by Richfield, Ohio-based October Research Corporation's Appraisal Intelligence that showed 8o percent of appraisers report they've felt pressured by lenders or brokers to hit certain values in order to get the loan approved. "That's not a good thing if you re a risk manager, so putting some distance between the local lending officer and the local appraiser could be positive from a risk-management standpoint," he says.

What can appraisers do?

Appraisers can do a number of things to prepare for the changes in the mortgage industry. Those working in markets where real estate appraisals are fairly uniform and straightforward will likely lose more revenue than those in markets with more unusual or difficult property appraisals, Olson notes. "That may mean you need to be more efficient or effective, or do alternative products," he says.

Appraisers who "have a specialty or niche will continue to have that, despite RESPA," agrees Appraisal.com's Cincotti. "For those appraisers who usually do the more generic lender assignments, which is the lion's share of appraisers out there, it will be necessary for them to become part of a network. The bundling will favor the very large service providers," Cincotti says.

Appraisers need to take their lead in large part from the clients they do business with, advises McGowan. "The RESPA reform is directly impacting lenders, so the appraisers need to see how they can bring solutions to clients," he says.

Banton also urges appraisers to ally themselves with management companies. "If they don't, and they realize their big clients just got cut off, it will be too late if the management companies made arrangements with other appraisers," he says. "Clearly if you don't make arrangements, it's foolish."

Appraisers should also be aware of the increasing automation and technology in the industry, Banton says. "If you don't have e-mail yet, lenders will stop paying attention to you," he says.

Mortgage bundling and further automation of collateral valuation are "redefining the opportunities for the appraiser," says LandSafe's Dennis. "I think the savvy ones are going to be motivated to figure out how to play in the new space."

RELATED ARTICLE: APPRAISAL INSTITUTE: Take Appraisal out of Bundle

WHILE THE CHICAGO-BASED APPRAISAL INSTITUTE AGREES THAT THE rules implementing the Real Estate Settlement Procedures Act (RESPA) are in need of reform, it opposes the proposal to bundle mortgage services and include the appraisal in that bundle, according to Alan E. Hummel, president of the Appraisal Institute. "We feel that it may be appropriate that some services be bundled, but because the appraiser is still one of those individuals that is offering an opinion of value that is unbiased, we want to make sure they're not subject to any type of pressure," he says.

Appraisers are local in nature, and creating a system that encourages appraisers to become part of a large nationwide network will likely cut into appraisal fees, Hummel says.

"If a big bank wants to bundle appraisal services, they will now go to a national type of company that offers appraisal, title and flood insurance. That large company is going to go to the local appraiser and say, 'I want to retain your services. But I'm only willing to pay you $275 because I have this guarantee out there that the appraisal is going to cost $275.' If the appraiser has been charging $325 for his services, he either has to cut his fee or not get the work," Hummel says.

The members of the Appraisal Institute are concerned that an appraiser who agrees to work for lower fees "may not necessarily be the most competent appraiser for that particular loan transaction," Hummel says. "My worry is that the consumer may end up receiving services that really aren't done by the most qualified individual."

A number of factors go into determining appraisal fees, Hummel notes. which would make it difficult to quote a set fee. "I may have a fee for a typical property in a metropolitan area. Then I have a different fee structure for the atypical property outside of the metropolitan area. You have to account for travel time and the amount of analysis done. Yet you have a company coming to you that wants you to give a set appraisal fee for each property appraised, but you don't know yet what the properties are," he says.

The Appraisal Institute has been encouraging its members to increase their work outside of the mortgage industry, in areas such as taxation, litigation, feasibility studies and eminent domain, Hummel notes. "I believe a good number of appraisers will start providing appraisal services outside the mortgage industry--and tend to move toward nonmortgage work, because it will better reflect fees for their services," he says.

"My concern is that there will be less-experienced appraisers out there who will provide that mortgage work for the lower fees. But is the consumer now getting the best service?" Hummel says.

Hummel outlined the Appraisal Institute's recommendations in testimony before the House Committee on Small Business earlier this year. Hummel asked the Department of Housing and Urban Development (HUD) to take appraisers out of the guaranteed mortgage package (GMP) and to retain the contract appraisal fee under the Good Faith Estimate. On behalf of the Appraisal Institute, Hummel also recommended an exemption from the tolerance or variance requirement for loans secured by high-value or otherwise atypical properties. Hummel further asked that RESPA include language prohibiting lenders from putting undue pressure on appraisers to come up with insupportable values.

Mary McGarity is a freelance writer based in Trumbull, Connecticut. She can be reached at nmcgarity6120@earthlink.net.