What Is an Appraisal Management Company (AMC)?

An Appraisal Management Company (AMC) is an independent entity through which mortgage lenders order residential real estate valuation services for properties on which they are considering extending loans to homebuyers.

AMCs fulfill an administrative function in the appraisal process, including selecting an appraiser and delivering the appraisal report to the lender. Individual appraisers who work for AMCs provide the actual property valuation services.

Understanding Appraisal Management Companies (AMC)

AMCs have been a part of the real estate landscape for the past 50 years. However, their numbers remained limited until the financial crisis of 2007 to 2008.

In 2009, the New York Attorney General, government-sponsored enterprises Freddie Mac and Fannie Mae, and the Federal Housing Finance Agency (FHFA) established the Home Valuation Code of Conduct (HVCC) appraisal guidelines. The HVCC guidelines, no longer on the books, laid the foundation for the appraiser independence found in the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Truth in Lending Act. Laws obligating lenders to use independent appraisers led to a sharp rise in the use and number of AMCs.

The HVCC and later federal regulation sought to limit the amount of direct contact that lenders could have with appraisers. Essentially, the U.S. federal government created appraiser independence requirements to prevent lenders from influencing appraisers to inflate property values, a problem believed to have contributed to the housing crisis.

With an AMC, mortgage brokers, loan officers, nor homeowners may select the appraiser for the property on which they want to lend/borrow funds. Since the former parties have a financial interest in the transaction, there is a risk they might attempt to influence the appraiser to assign a higher value to the property than market conditions support so the transaction will go through.

Appraisal Management Company (AMC) Requirements

AMCs maintain a pool of state-licensed or state-qualified appraisers to meet requests from lending institutions. An appraiser is then assigned to provide an appraisal report for the property.

AMC appraisers are not provided with any prior information regarding the property or put in contact with the lending institution. The appraiser’s assessment must meet the Uniform Standards of Professional Appraisal Practice (USPAP) guidelines. If there are any issues, the AMC can legally assist.

What Is Agency by Necessity?

Agency by necessity is a type of legal relationship in which one party can make essential decisions for another party until legally recognized agents like someone with power of attorney or guardianship are put in place. The courts recognize agency by necessity during an emergency or urgent situation under which the beneficiary is unable to provide explicit authorization. Under such circumstances, those granted agency must act for the sole benefit of the beneficiary.

In finance, agency by necessity often takes the form of replacing an individual’s investment or retirement decisions.

Understanding Agency by Necessity

Emergency situations often lead to agency by necessity in the eyes of the court. For example, if an individual is sick and unable to make a critical investment or retirement decision, agency of necessity would allow an attorney, parent, or spouse to make decisions on behalf of the incapacitated party.

Agency by necessity becomes important in wealth management. For example, many wealth managers are involved in the creation of wills, trusts, and overseeing inheritances of wealth from one generation to the next. If a family member in possession of or who is an agent of the family’s wealth becomes incapacitated in an accident or is ill, another close family member of similar capabilities and understanding of the family finances may take over as an agent of necessity.

At times this can become fraught, however, particularly in cases of high net worth individuals or wealthy families that have to make decisions about wealth distribution for future generations. Family members and additional stakeholders may take issue with decisions that the agent by necessity makes.

Agency by Necessity and Estate Planning

Although many conduct their estate planning before becoming incapacitated, at times these tasks may be given to an agent by necessity. Estate planning entails a variety of critical tasks such as the bequest of assets to heirs and the settlement of estate taxes. Most estate plans require the help of an attorney. Estate planning can also take into account the management of an individual’s properties and financial obligations. If the individual owes debts and is not of sound mind to pay them, an agent by necessity may step in to figure out a plan for repayment.

The assets that could comprise an individual’s estate include houses, cars, stocks, bonds, and other financial assets, paintings and other collectibles, life insurance, and pensions. These must be distributed as the individual has chosen after passing. In addition to preserving family wealth and providing for surviving spouses and children, many individuals will undertake serious estate planning to fund children or grandchildren’s education or leave their legacy to a charitable cause.

Specific estate planning tasks could include but are not limited to:

• Writing a will
• Limiting estate taxes by setting up trust accounts in the name of beneficiaries
• Establishing a guardian for living dependents
• Naming an executor of the estate to oversee the terms of the will
• Creating/updating beneficiaries on plans such as life insurance, IRAs, and 401(k)s
• Setting up funeral arrangements

What Are Agency Costs?

An agency cost is a type of internal company expense, which comes from the actions of an agent acting on behalf of a principal. Agency costs typically arise in the wake of core inefficiencies, dissatisfactions, and disruptions, such as conflicts of interest between shareholders and management. The payment of the agency cost is to the acting agent.

Understanding Agency Cost

Agency costs can occur when the interests of the executive management of a corporation conflict with its shareholders. Shareholders may want management to run the company in a certain manner, which increases shareholder value.

Conversely, the management may look to grow the company in other ways, which may conceivably run counter to the shareholders’ best interests. As a result, the shareholders would experience agency costs.

As early as 1932, American economists Gardiner Coit Means and Adolf Augustus Berle discussed corporate governance in terms of an “agent” and a “principal,” in applying these principals towards the development of large corporations, where the interests of the directors and managers differed from those of owners.

Principal-Agent Relationship

The opposing party dynamic is called the principal-agent relationship, which primarily refers to the relationships between shareholders and management personnel. In this scenario, the shareholders are principals, and the management operatives act as agents.

However, the principal-agent relationship may also refer to other pairs of connected parties with similar power characteristics. For example, the relationship between politicians (the agents), and the voters (the principals) can result in agency costs. If the politicians promise to take certain legislative actions while running for election and once elected, don’t fulfill those promises, the voters experience agency costs. In an extension of the principal-agent dynamic known as the “multiple principal problems” describes a scenario where a person acts on behalf of a group of other individuals.

A Closer Look at Agency Costs

Agency costs include any fees associated with managing the needs of conflicting parties, in the process of evaluating and resolving disputes. This cost is also known as agency risk. Agency costs are necessary expenses within any organization where the principals do not yield complete autonomous power.

Due to their failure to operate in a way that benefits the agents working underneath them, it can ultimately negatively impact their profitability. These costs also refer to economic incentives such as performance bonuses, stock options, and other carrots, which would stimulate agents to execute their duties properly. The agent’s purpose is to help a company thrive, thereby aligning the interests of all stakeholders.

Dissatisfied Shareholders

Shareholders who disagree with the direction management takes, may be less inclined to hold on to the company’s stock over the long term. Also, if a specific action triggers enough shareholders to sell their shares, a mass sell-off could happen, resulting in a decline in the stock price. As a result, companies have a financial interest in benefitting shareholders and improving the company’s financial position, as failing to do so could result in stock prices dropping.

Additionally, a significant purge of shares could potentially spook potential new investors from taking positions, thus causing a chain reaction, which could depress stock prices even further.

In cases where the shareholders become particularly distressed with the actions of a company’s top brass, an attempt to elect different members to the board of directors may occur. The ouster of the existing management can happen if shareholders vote to appoint new members to the board. Not only can this jarring action result in significant financial costs, but it can also result in the expenditure of time and mental resources.

Such upheavals also cause unpleasant and exorbitant red-tape problems, inherent in top-chain recalibration of power.

Real-World Example of Agency Costs

Some of the most notorious examples of agency risks come during financial scandals, such as the Enron debacle in 2001. As reported in this article on SmallBusiness.chron.com, the company’s board of directors and senior officers sold off their stock shares at higher prices, due to fraudulent accounting information, which artificially inflated the stock’s value. As a result, shareholders lost significant money, when Enron share price consequently nosedived.

Broken down to its simplest terms, according to the Journal of Accountancy, the Enron debacle happened because of “individual and collective greed born in an atmosphere of market euphoria and corporate arrogance.”