Appraisal Management Companies, or AMCs, have been around for decades, going back 50 years or so. But over the last 10 years they’ve taken on a new importance and significantly changed the appraisal process. As the name implies, an AMC manages the ordering, receiving and distributing an appraisal to the mortgage company that needs the valuation in order to complete the loan approval process.
The Dodd-Frank Act was signed into law soon after the housing debacle in 2008-2009. Part of this sweeping legislation was aimed directly at mortgage lenders and mortgage brokers. Prior to the Act, a mortgage company needing a property appraisal would call an appraiser from its approved appraiser list, provide the borrower’s estimated value of the subject property to the appraiser and wait for the report to be delivered. The Dodd-Frank Act introduced an important firewall to change this process.
The reason for this change was providing a higher value than what market conditions might report could negatively impact the local real estate market. Say the lender needed to reach a certain value before a loan could be approved. The lender would contact the appraiser and ask if that value could be reached. If the appraiser didn’t think so, the lender could move onto the next on the list and present the same question. It could even mean the lender could contact multiple appraisers until the right value was found. Note, this wasn’t a common practice but a practice, nonetheless. Appraisals could even feel some pressure to come in at a particular value just to get the appraisal order.
The impact could be that falsely generated valuations might have a negative result. What if the owners of a home who took advantage of an inflated value were forced into making some crucial financial decisions, including selling the home or going directly into foreclosure? With the higher initial appraised value, selling the home on the open market might not bring in enough to cover the outstanding loan balance. In such an event, the only option would be forcing a foreclosure. A foreclosure can affect not just the owners of the property but homeowners in the surrounding neighborhood. The AMCs were created to address this.
Now, when a mortgage lender wants to order an appraisal, it contacts an appraisal management company. The lender places the order with the AMC who then orders the appraisal directly from a list of approved appraisers. The distribution of appraisal orders to its database of appraisers should be equal among its list. The lender has no say with regard to valuation. In fact, the lender isn’t even allowed to speak directly with the appraiser assigned to the order. The only exception might be when there is an obvious mistake on the appraisal or the appraiser missed some recent comparable sales that is affecting the final value Even then, lenders might prefer to object with the AMC and let the AMC take it from there.
The final result is an independent, influence-free report. Now, when a lender receives a completed appraisal from the AMC, lenders and investors alike can feel confident the value provided was based on completely unbiased data. It took a while for lenders to adjust to the new process. Adding another layer to the lending process could potentially delay a loan approval. Lenders soon discovered there was in fact no noticeable delay and today it’s just another part of the process.