Musical (Vanishing) Chairs

The news of the day relates to Clear Capital, a California-based property valuation and data analytics company who – among its vast suite of offerings – acts as an appraisal management company in thirty-four states. Clear Capital announced a “significant investment” by GTCR, a private equity firm out of Chicago who is now the majority shareholder of Clear Capital. Sounds like a boring financial transaction, right?

Wrong.

It was a matter of when, not if, private equity got wise to investments in AMCs specifically. After all, two primary strategies employed by private equity to increase company values are to get acquisitive and lean, and there is plenty of room for both in the AMC space as it currently exists.

Right now, demand for appraisals – and orders flowing through AMCs – is down considerably from pandemic highs. There are more AMCs than the market currently needs, and many of these AMCs have smaller, regional footprints. The ability of GTCR through its acquisition of Clear Capital to begin consolidating these smaller entities under its umbrella makes sense – you grab market share you currently lack and can trim redundant positions to make the balance sheet more favorable.

Structurally, it is no different from Class Valuation’s recent acquisition of Appraisal Nation – growth through acquisition. The substantial difference, though, is in the broader motivation of private equity to maximize value through the combination of consolidation AND expense reductions.

Reducing expenses is always a faster option to improving the balance sheet than finding growth; the former is self-effectuated while the latter requires some external forces working in your favor. With demand for appraisals and AMC ordering down, it makes sense that GTCR will look first for ways to trim the budget. How, you ask, does this impact appraisers?

Start with panel management costs. Every time an AMC adds an appraiser to its panel, and they perform at least one appraisal per year/per state, there is a National Registry cost incurred that flows up to the Appraisal Subcommittee. While that cost can (and sometimes is) passed on to the appraiser, the AMC is stuck carrying that liability on their books for the entire year. This says nothing of what each individual state charges for AMC registration, various bond and insurance requirements, and ancillary costs of doing business on a multi-state basis.

One way to reduce costs? Reduce the total number of appraisers relied upon to complete assignments in each state.

In the current environment, this is an achievable goal for GTCR – especially with broader adoption of alternative products like property data collection supported desktop appraisals. They can even leverage an internal staff appraiser for those assignments, thereby reducing the Registry related cost to zero. While the individual incremental cost does not sound like much, it adds up when aggregated on a national level.

(Aside: I hear a lot about AMC staff appraisers, and how they are “illegal.” They are not – Dodd-Frank specifically contemplated “Hybrid” firms that are both an AMC and an appraisal firm, and they are responsible for complying with the respective laws and regulations for each function. That says nothing, of course, about the pros and cons of such a model to the independent appraiser or appraiser independence.)

Consolidation plus panel headcount reduction – does not sound promising for independent appraisers, does it?

There is more when you consider the other recent trend of vertical integration. While the Rocket-Redfin deal is Exhibit A, I see nonbank lenders of all sizes trying to follow this approach, using the non-originating and non-servicing elements of an integrated model as loss leaders to facilitate capture and retention. When you can profit everywhere in the transaction, you are more willing to lose money in the smaller dollar aspects like appraisal or inspection.

Some AMCs are reliant on a small number of larger lenders for their order flows – if those same lenders consolidate everything in the funnel, those leads go away along with the need for that AMC’s panel of appraisers. Fewer leads, less volume – and primed to be acquired by a private-equity backed AMC.

The net effect of both approaches is a reduction in the total number of appraisers required to facilitate the volume of lending happening today, and the likelihood that lenders and GSEs will chance lower total numbers in busier times since (in theory) desktop-level products mean more throughput per appraiser.

As much as we have not seen performance of alternatives to traditional appraisals in downturns like 2008, the GSEs would tell you that the number of nonperforming loans or repurchase requests using these alternatives do not outstrip those loans backed by traditional appraisals.

Bottom line, if you are only doing residential mortgage lending work, this is the time to consider a few things:

• Do I have enough sources of orders to survive consolidation and vertical integration?

• Does my business flow make me time and cost competitive with larger competitors?

• Do I have enough niches or specializations to be a distinct “expert” for certain assignments?

• Am I willing to accept a range of appraisal types, or am I wedded to traditional appraisals?

I have come this far without addressing the big question: What does this all mean for safety and soundness of lending? With fewer players in the game, the motivation to be easy to work with (read: more agreeable on finding values that support contract price) and therefore preferred by clients is strong. In vertical integration, it is to reduce overall friction (read: sales price variance in appraisals) in the pipeline.

The major reason appraisals needed to be isolated from other lending functions is because the incentives to create objective, unbiased opinions of value are lower than the profit motive driving each loan, especially where the loan is headed for secondary market. It is a volume game at a time of low volume, so those pressures to keep what is moving afloat can be dramatic for everyone, especially with fewer competitors and more internalization. If the safeguards fail to protect the independence of an appraiser’s opinions, it sets up for something that could rhyme with 2008.

Less demand, fewer appraisers, and more consolidation and vertical integration: This is the world of residential mortgage appraisal in 2025. I know many (myself included) with strong reservations about where things are headed, but until regulators or Congress decide to intervene, there is little to ward off this change – for better or worse.