Appraisers who were under third-party contract with appraisal management company (AMC) AppraiserLoft are holding millions of dollars in unpaid invoices for work completed within the past few months.

Now-defunct AppraiserLoft’s CEO blamed the flat-line real estate market for the precipitous decline in appraisals, causing the company to eliminate nearly the entire staff and unexpectedly terminate all contracts. Appraisers who worked with the out-of-business AMC slowly learned the company’s fate from local news reports when their long-awaited checks never arrived.

Before going bust, AppraiserLoft confirmed that the company would no longer be taking appraisal orders from lenders or assigning work to appraisers. Now, appraisers owed between hundreds and thousands of dollars are unsure where to turn, as the lenders’ checks to AppraiserLoft for the work done by the appraisers have already cleared.

first tuesday take: Appraisal business practice has always been riddled with incentives that have precipitated crisis within the real estate market.

In an attempt to regulate the Savings and Loan (S & L) crisis in the 1980’s, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 was passed addressing appraisers as the problem.

Appraisal aspects of FIRREA were modified in 2009 to stop the perceived collusive activity between lenders, agents and appraisers. New requirements established previously unheard of government mandated facilitators (the AMCs). These artificial middleman act as a mediary between lenders and appraisers who had previously contracted for services directly — no third-party in the selection process regarding which lenders to work for and which appraiser to employ, or in the collection and disbursement of fees.

Both unnecessary for the work they do coordinating lender and appraiser needs, and historically absent, the newly-established AMCs artificially increase homebuyers’ appraisal costs and decrease the appraiser’s fee earnings. In the enlarged scheme for handling job assignments, extra money is extracted from buyers for the lender and the facilitator. With a facilitator between the two only economic parties in the appraisal process, appraisers now receive less pay for the same work (or in cases like AppraiserLoft, no pay at all). Buyers, being the ultimate consumer, pay more.

This government mandated appraisal-mediary arrangement has been unceasingly problematic, to say the least. Any agent worth their salt knows exactly how to get the purchase agreement with its sales price directly to the appraiser – and in it the number needed now known without a word said. [For more information on appraisal management companies driving up appraisal costs, see September 2010 first tuesday article, The good faith estimate is designed for shopping around.]

If overinflated appraisal charges imposed by lenders on buyers have not alerted appraisers, lenders and borrowers enough (and in turn Congress), then perhaps situations such as this AppraiserLoft debacle will. Costs created by AMCs are far too large to continue endorsing these companies as the solution to appraisal. The experiment has failed.

Through necessary government codes/regulations, it is time to eliminate the appraisal assignment task transferred to this go-between for mortgage lenders and home-value appraisers. Lender-appraiser collusion has always been a byproduct of boom times. If we can manage the market to keep counterproductive real estate booms at bay, AMCs will become but a distant memory of the real estate market’s profligate past. [For more information regarding reclaiming integrity in the business environment, see November 2011 first tuesday article, Damage control: restoring public trust in real estate professionals.]

Re: “Appraisers say they’re left holding the bag” from Sign On San Diego

AppraiserLoft closure leaves $3M in unpaid appraisal invoices” from HousingWire