More AMC reliance, fee pressure part of a normalizing market

Last week Washington Mutual announced it was cutting some 900 jobs, including hundreds in its in-house appraisal department, in favor of outsourcing appraisal management to two Appraisal Management Companies, LSI and a First American unit. The transition is underway and will proceed "throughout the remainder of 2006."

At the same time, other national AMCs affiliated with top five mortgage lenders have contacted some appraisers on their fee panels to announce planned fee cuts. Some appraisers have received written take-it-or-leave-it "offers" to stay on the panels in exchange for agreeing to drop fees.

What's driving all this? A slowing residential mortgage market, surely. The market slows and speeds all the time. So many people involved in the mortgage business, from production to processing to vendors, are relatively new to it after a historic housing (and hiring) boom. So they've never seen a hot market cool to normal. But we certainly have, as have many of you.

It's the peg many of these lenders and AMCs are hanging these decisions on that's interesting. There is increased regulatory scrutiny to ensure production staff aren't involved in choosing appraisers or ordering or managing the appraisal. WaMu and other companies are pointing to this new thrust toward ensuring appraiser independence as a reason for relying on AMCs more.

But reducing fees has nothing to do with assuring appraiser independence. That part of it has to do with what you'd think it has to do with – trimming overhead and buffering the bottom line at a time when revenue is dipping.

Home buyers and refinancers – so many of whom, these days, are rolling their costs into their loans anyway – are not clamoring to save money on appraisal fees. And remember, they're the ones that pay them.

AMCs' business models rely on paying their vendors (you) $X and charging their customers (lenders) $X+Y. If lenders are more anxious to use AMCs' services – as many are with the regulatory environment what it is – competition among AMCs for that pool of $Ys increases. The larger AMCs, with more appraisers relying more heavily on their work, can promise and largely deliver a reduced $X, allowing them to reduce $Y but net the same difference.

There is nothing wrong or surprising about businesses trying to rein in their costs when faced with a normalizing market for what they sell. But it's only tangentially related to new regulations or promised enforcement of appraiser independence from production staff. It's directly part of a market cycle, something veterans of this business have seen time and time again.

And somehow, we always survive. Many of us even grow and prosper. The key is staying on an even keel, doing great work and not overreacting to every fit and start of a real estate cycle.