Once upon a time, we lived in a perfect world where everyone knew everyone and things went smoothly with the appraisal process. Your loan officer (mortgage broker or mortgage banker) had a list of appraisers that she knew understood the market, and ordered appraisals directly. In a perfect world, loan officers and appraisers never argued about property values, and never collaborated to inflate values to commit loan fraud. Loan officers never put pressure on appraisers to increase values so they could fit a loan into the right ratios, and appraisers never deliberately ignored good comps that didn't support the property value. Since the borrower relied on the integrity of the process, they never got taken advantage of and didn't end up with property that was not worth what they paid and lenders didn't get loans on property that was worthless.
YEAH, RIGHT!
We really never lived in that world, and the Attorney General of the State of New York went after Fannie and Freddie and obtained a consent decree that later became the Home Valuation Code of Conduct (HVCC).
In sum, HVCC prevents anyone with a direct financial stake in the loan origination process from having any communication with the appraiser until the appraisal has been submitted for review. Other than sending the appraiser a sales contract, no contact is permitted until underwriting, at which point the underwriter may request further information, clarification, or corrections.
Only lenders may order appraisals now (cutting mortgage brokers off completely from the appraisal process). Mortgage bankers who work directly for lenders must rely on their lender's compliance with HVCC. Mortgage brokers are completely at the mercy of the lenders they use.
To comply, lenders have essentially two approaches depending on their size and business operations. Either they contract the appraisal ordering process out to a third party, known as an appraisal management company (AMC) or they set up a separate department within their operation that orders appraisals but that has no direct financial stake in the loan approval process.
AMCs contract with appraisers to do the work, and have been getting a reputation for not paying appraisers as much as they would otherwise earn. For example, an AMC might charge the lender $500 for an appraisal, then offer to pay the appraiser $250 in a market where most appraisers normally charge $350.
The net result is what you'd expect: many local appraisers won't take the assignments, so the AMC ends up scrounging up an appraiser from someplace else who is hungry enough to work for less. Now you have an appraiser coming in from outside the area, or who is inexperienced. You won't have to look hard for appraisal horror stories these days, and this is one of the root causes.
I'm not saying that all appraisers sent by an AMC are bad, but the likelihood of getting someone who doesn't have the best possible market knowledge for your area increases substantially with AMCs.
The only time an AMC can be useful is if one is doing a deal outside one's own local area, but this, too, is a two-edged sword. When a non-local lender is involved, such as a hometown bank with a relocating or second home buyer, then an AMC likely will be used order the appraisal, with some risk that the assigned appraiser will not know the market.
That is why realtors try to get buyers to use local lenders. However, if the local lender's company now uses an AMC, you could still have a problem.
If your local mortgage banker works for a lender that has its own appraisal ordering department, then they will have a roster of local appraisers among whom assignments get rotated. In most cases, to keep things simple, there will be two or three firms that will be used consistently. These appraisers will be carefully chosen for their expertise, and you can count on the fact that they know the local market.
So, when you next shop for a mortgage, you must ask the question, "Who is ordering the appraisal?" It could make a big difference in your outcome.
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