| Can Vendor Managers Ensure Clean Appraisals?
By Erick Bergquist
American Banker, October 26, 2004
Vendor management firms are supposed to be part of the solution to the problem of tainted appraisals.
These firms, which have become a mainstay for most lenders over the past decade, have taken over most in-house closing service functions.
Here's how they work: A loan officer or broker typically places an order for a settlement service with a vendor management firm, which then goes through its roster of vendors and farms out the order to one or more of them. A reviewer then usually goes over each order to ensure that appraisals and title searches are accurate.
By serving as a buffer, proponents say, vendor management firms prevent loan officers or brokers from unduly influencing appraisers to overstate valuations.
However, some appraisers say that these companies have been recently making matters worse. Critics charge that the companies lean on appraisers to do more work, with a faster turnaround, for lower fees-all of which comes at the expense of accuracy. They also say that these centralized national operations cannot know whether the appraisals they get from the field are accurate.
Most disturbing, say critics, is the notion held by some that the management companies have a conflict of interest when they are owned-as they often are-by the same banks and lenders they serve.
Jonathan Miller, the president of Miller Samuel Inc., an appraisal firm in New York, said that by turning appraisals into a commodity, vendor management firms are damaging appraisal quality across the board.
"If a management company comes to an appraiser and says, 'We'll give you a lot of work and a low fee, and you'll make it up on volume,' then corners are going to be cut," Mr. Miller said.
Aside from shielding appraisers from aggressive loan officers and brokers, supporters say vendor management firms drive down the costs of ordering settlement services through scale and technology. They also spare lenders from having to hire and fire closing services staff when mortgage business fluctuates.
"Fortunately or unfortunately-and it depends on your perspective - there is a demand for satisfying time frames and trying to minimize fees," said John Mason of Mason Appraisal Services in Yorktown, N.Y. That demand is driving the appraisal business to "the lowest common denominator. It's the individuals who can process the most amount of work in the least amount of time for the least amount of money that take up the bulk of that type of work."
Patrick McElhaney, the president and CEO of GreenLink LLC, a vendor management firm owned by Wachovia Corp., disagreed. GreenLink was created for risk management, he said, not as a profit generator.
"We're in the appraisal business for one overriding reason: It's not really making money, it's all about providing credible value to real estate collateral."
Based in Jacksonville, GreenLink was formed in January 2000 by the former First Union (which acquired Wachovia in 2001). The company does "the bulk of its business" with Wachovia's mortgage and home equity units, but also does "a material amount of business with unaffiliated third parties," according to Mr. McElhaney.
GreenLink is organized separately from Wachovia Mortgage as a subsidiary of the holding company. Mr. McElhaney reports to Bob Burton, who is in charge of all of Wachovia's consumer finance businesses, including Wachovia Mortgage.
There are two reasons for this setup, Mr. McElhaney said. "One, lenders are not allowed to own vendor management for profit operations," and the second is "to create that distance between the sourcing of the collateral information and the actual use of that information in the process."
"In most cases," he said, "the lender doesn't talk to the appraiser." An employee of GreenLink stands between them. The only time they do talk, he said, is if there is a "technical problem from an underwriting point of view" or if the vendor management firm is "having a hard time scheduling a visit to the property."
Patrick C. O'Brien, the chief operating officer of Amco, an independent valuation management firm in Cleveland, said that "there seems to be a per se conflict if a lender is also controlling the valuation. Even though banks set up subsidiaries to handle appraisals and other settlement services," he said, the banks are "still making money off those."
For this reason, he said, his company is not controlled by a bank or a mortgage company, and does not provide other settlement services, such as title insurance, so as to avoid any negative influences on its valuations. "We don't have any upstream or downstream revenues," he said. "We have no ties to the transaction or the property."
Amco has recruited to its board former Housing and Urban Development Secretary Andrew M. Cuomo, and William C. Apgar, Mr. Cuomo's former Commissioner of the Federal Housing Administration. Mr. Apgar is now a senior scholar at the Joint Center for Housing Studies at Harvard University.
Regulators, who show ample concern over loan officers and brokers trying to pressure appraisers, do not seem as worried about vendor management firms.
An interagency banking bulletin issued in October 2003 said that the lending/underwriting and appraisal functions should remain distinct.
Barbara Grunkemeyer, the deputy comptroller of the currency for credit risk, said that her agency views vendor management firms as "agents" of the banks that own them, and that she sees no conflict of interest.
"There is the desire on the parent company's part that a vendor management subsidiary generates certain profits," she said in a September interview.
"On the other side there is the desire on the part of the parent to generate quality loans, regardless of whether or not it is holding or selling the mortgages. Certainly if it is holding them, it has a vested interest in getting quality appraisals. I'm not sure of the kind of conflicting incentive here."
She added that "I'm not going to say that every vendor management firm affiliated with a national bank is operating in a totally safe and sound manner," but noted that the OCC's examiners closely monitors these firms.
Mr. Miller, the New York appraiser, said that vendor management firms, which are typically centralized and national in scale, "are usually" not in touch with local real estate markets and therefore would find it difficult to know whether an appraisal from a given area is accurate.
He said that the employees who perform desktop reviews on appraisals from the field "just aren't familiar with the idiosyncrasies of the location." For instance, he said, values change block to block in a city like New York.
Jane Prokop, the president HomeCloser, MortgagelT Inc.'s vendor management unit in New York, said that most vendor management firms have in-house appraisers who review the work sent to the firm.
If the firm's client-typically a loan officer or broker-has a question, it gets addressed to that staff member, and not to the appraiser who did the field work.
"It provides for objectivity," she said. "It removes the site-visit person from the direct pressure from the client." The in-house staff can also resolve disputes between the appraiser and the client, she said.
Appraisers do not get taken off the management firm's roster unless there are consistent errors in their work, she said, "like it's missing objective data and not adhering" to generally accepted appraiser standards.
"If every single time they're using comparable sales that are 30 miles away, that's a problem."
The in-house appraiser, she said, is paid on salary, not commission, and so has no incentive to encourage outside appraisers to come up with values that the loan officer or broker wants.
She said that vendor management firms are also very careful to get appraisals right so as not to create liability for the parent company.
Mr. Miller had a different take on the situation. "The quality of reports that are completed, from what we've seen, has been substandard," he said. He said that's because the vendor management firms are "looking for people who can turn things around very quickly at low fees. We call them form-fillers."
Mr. McElhaney said that at GreenLink it's "OK not to hit values" for an appraiser and that the appraiser would not be fired for missing values that the lender was seeking.
If an appraiser "decides to compromise professional standards because of pricing," Mr. McElhaney said, "that is a shortsighted business strategy that will catch up with them."
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