The Federal Housing Finance Agency (FHFA) released Working Paper 18-01, co-authored by Jessica Shui and Shriya Murthy, for every appraiser, and anyone who relies on appraisals.
Appraisal management companies became prominent largely due to their nature as intermediaries that prevent lenders from directly pressuring appraisers to “facilitate” transactions, but this function was only intended to be the means to an end—a means of approaching unbiasedness in appraisals. Simply playing the firewall is not all an AMC can do to improve appraisals; there is still the matter of quality assurance. An accurate, well-documented appraisal cannot support an inflated valuation, the authors said.
“In this paper, we specifically study the differences in quality between appraisals associated and unassociated with appraisal management companies. Our analysis indicates that, when compared to non-AMC appraisals, AMC appraisals generally demonstrate a similar degree of overvaluation,” Shui and Murthy said. “At the same time, AMC appraisals seem to be more prone to contract price confirmation and super-overvaluation. Beyond valuation statistics, AMC and non-AMC appraisals seem to share a similar propensity for mistakes, a somewhat-unexpected finding given that the former tend to use a greater number of comparable properties.
“Our research has two main policy implications,” the authors added. “In the first place, AMCs can be more effective, specifically in fulfilling their roles as firewalls and in implementing quality assurance—a main administrative function that also happens to be crucial to the objective that prompted their expansion. Secondly, borrowers’ access to credit may be affected by this lack of effectiveness in the long run. Some would argue that because AMCs take a cut of prevailing appraisal fees and decrease appraisers’ take-home pay, their growing prevalence may have contributed to an appraiser shortage. This shortage could lead to increased costs and growing timelines for appraisals in the future.”
It was also noted that while its evaluation employs relatively basic statistical comparisons, the results provide scant evidence of any systematic quality differences between appraisals associated and unassociated with AMCs. Future research can focus on the incentive and organizational structures of AMCs as well as on the network structure among AMCs and lenders. Such structures might have substantial impacts on appraisal quality.
“One might assume that a greater number of comparables would be correlated with a greater amount of appraiser effort, which in turn would be inversely correlated with the number of mistakes,” the authors said.
For more information, click on the working paper.