What slows down an closing? Part 1: Don't use an AMC
Updated: May 11, 2021
A closing is the culmination of the mortgage process. One of the step in that process is the appraisal, and since they're an independent party who doesn't communicate with the borrower or seller, an easy target to say, "The appraiser hasn't finished the report yet" (Side note: I can't count the number of times a borrower has called me, angry that my report is "late" to the lender, when the lender had it weeks earlier.) An appraisal is a complex observation, analysis, and reporting process. Each step must be accurate for the "number" delivered at the end to be accurate. Today we'll look at some of the issues that slow down appraisals, and how you can avoid them.
AMC's - "Appraisal Management Companies"
The mortgage fraud committed by lenders prior to 2007 needed to be corrected. Lenders could pick their appraiser, and then threaten to not pay unless the loan closed (in other words, the appraiser better "hit the number"). In response to this, the federal government passed regulations that intended to put a layer of independence between the appraiser and the lender. AMC's arose as an option to use, and in some cases, work well. They act as a middle man, ordering the appraisal, communicating with the appraiser, and paying the appraiser. However, the business model is able to be abused just as badly as before.
If the lender finds that the AMC's appraiser doesn't hit the number enough, they can fire the AMC with no repercussion.
The AMC makes money by taking part of the fee. Some AMC's charge a small fee and offer a basic preliminary review. Others shop the appraisal around to the "bottom feeders" who will take as little as possible, and they keep the difference.
AMC's can fire an appraiser for no cause with little reprocusion.
I've had more stories of AMC abuses than good come across my desk: I've seen reports farmed out to low bidders for weeks and months, appraisals be offered to appraisers 3 states away, and ask ridiculous follow-up questions like "Is this 5,445 sf lot a working farm?" I'm sure the lender was glad to know that a city lot did not qualify for raising livestock...
So, we see that the AMC model has 1) reintroduced potential fraudulent practices, 2) slowed down the process by shopping low fees, 3) Artificially inflates fees by keeping the difference, 4) Reduce the quality of appraisals by using only those will to take the least amount. How can you avoid this?
Only work with a lender that doesn't use an AMC
IF your preferred lender uses an AMC, insist that they pay for the AMC fee
Insist that the appraiser be paid according to the Veteran's Affairs fee schedule of appraisers (to avoid low quality, bottom feeders)
Be an informed consumer, don't just take what the lender gives you. Ask questions.
Up next in the "What slows down a closing" series, lenders and heavy market volume.