The FHFA has released a new paper, authored by Jessica Shui and Shriya Murthy, that examines how appraisals conducted by appraisal management companies compare to those conducted by lenders themselves. What’s the verdict? According to the FHFA paper, “the results indicate no clear evidence of any systematic quality differences between appraisals associated and unassociated with AMCs.” In other words, the FHFA data suggests that the appraisal results provided by AMCs are statistically very similar to those provided by lenders working without a middleman.
According to the FHFA paper, the theoretical advantages of lenders employing an AMC include providing extra quality assurance to the appraisal process, providing a firewall to prevent lenders from pressuring appraisers, and providing both reduced credit risk and management time for lenders. Critics of AMCs, however, argue that AMCs “offer no quality assurance contribution,” set unrealistic deadlines for appraisers, and contribute to an overall shortage of appraisers in the market. The FHFA paper argues that the latter factor occurs due to the AMCs taking a cut of the payments to appraisers, resulting in lower appraiser compensation that attracts fewer workers to the field. This, in turn, can “lead to delayed closings and rush fees that increase costs to homebuyers,” according to the report.
“Our analysis indicates that, when compared to non-AMC appraisals, AMC appraisals generally demonstrate a similar degree of overvaluation,” states the FHFA report. “At the same time, AMC appraisals are seen 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.”
The FHFA study involved a dataset drawn from GSE data and stretching from Q4 2012 to Q1 2016. The dataset includes over 5 million appraisals conducted within that period, with 3.7 million done by AMCs and 1.6 million done by non-AMC appraisers.
The study came away with four main conclusions. First, both AMC and non-AMC appraisals “share a similar average degree of overvaluation, as captured by the percentage gap between the appraised value and the contract price.” Second, a similar ratio of mistakes was found within each category. Third, AMC appraisals were “more prone to contract price confirmation and ‘super-overvaluation,’” in spite of, fourth, “employing a significantly greater number of comparable properties on average.”
A 2017 white paper released by HouseCanary highlighted both the importance of accurate appraisals and the increasing role technology will play in the sector going forward. “The future of appraisals is already signaling a sea change for nearly every segment of the real estate industry, and the signal is only growing louder,” the study noted. “We are not far from a time when investors can see the potential aggregated rental yield of a nationwide portfolio in a matter of minutes—or get a value estimate for a property they see on their morning commute using nothing more than a mobile phone app.”
You can read the full FHFA working paper by clicking here.