Appraisal Podcasts

As I noted in an earlier post on a similar topic, alternative valuation methods such as automated valuation models (AVMs), drive-by appraisals, and broker price opinions (BPOs) for newly originated first lien mortgages will no longer be subject to a reduced property valuation based on the location of the property according to Fitch Ratings in the latest edition of ‘Mortgage Principles and Interest’.

The use of automated valuation models to assess the value of a home may no longer result in property value penalties, according to a new criteria report by Fitch Ratings.

Fitch addressed the use of automated valuation models (AVMs) in U.S. residential mortgage properties in 2004, differentiating the risk of AVM’s by region. Fitch said it would discount property values derived from an AVM assessment from 10%-15% in regional markets deemed ‘weak’ or ’soft’. In Fitch’s revised criteria, the focus has now shifted from the region directly to a lender’s process and controls for using AVMs, according to Senior Director Suzanne Mistretta. Fitch will apply new guidelines to evaluate each originator’s program and process for using an AVM or other non-full appraisal method.

‘Property valuation is critical in determining losses on residential mortgage loans since their quality can significantly affect RMBS performance,’ said Mistretta. ‘Therefore, Fitch will discount property values by 5% or more if either a lenders usage processes and controls do not adequately mitigate overvaluation risk, or if a lender’s processes are not disclosed to Fitch.’

The usage of non-full appraisals does have benefits, which is why Fitch has developed guidelines for reviewing an originator’s use of AVMs, drive-by appraisals and broker price opinions (BPOs) as a sole valuation tool for first lien originations. ‘Comprehensive program business rules, reasonable tolerance levels, photos of the subject properties and use of confidence scores are all ways that a lender can mitigate overvaluation risk,’ said Mistretta.

New Treatment of AVMs in RMBS is available on the Fitch Ratings web site at www.fitchratings.com (requires free log-in).

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from the site, at all times.

Click here for full report (may require free registration)

Alternative valuation methods such as automated valuation models (AVMs), drive-by appraisals, and broker price opinions (BPOs) for newly originated first lien mortgages will no longer be subject to a reduced property valuation based on the location of the property according to Fitch Ratings in the latest edition of ‘Mortgage Principles and Interest’.

Previously, for lenders’ processes reviewed by Fitch, Fitch discounted non-full appraisal values by 10-15% for properties located in regions considered to be soft or weak by Fitch. This approach was based on Fitch’s concern that AVM data might significantly lag the market in these regions. Fitch has conducted research on AVMs and concluded that there is no significant lag. Fitch will evaluate each lender’s processes and controls for its AVM and other non-full appraisal usage as a sole valuation tool for new first lien originations to ensure that overvaluation risk is adequately mitigated, according to Senior Director Suzanne Mistretta.

‘If, based on Fitch’s evaluation, a lender’s non-full appraisal program could potentially increase a pool’s loss exposure, Fitch will discount property values 5% or more for each loan that does not have a full appraisal, irrespective of its location,’ said Mistretta. ‘Fitch will also apply the same discount to lenders who do not disclose their non-full appraisal guidelines and methodologies.’

The newsletter also includes Fitch’s approach for rating prime and Alt-A hybrid ARM and fixed rate interest-only mortgages (IOs).

Prime and Alt-A hybrid adjustable rate mortgages (ARMs) with 10-year interest only periods have a low risk of default due to payment shock relative to many of the affordability products available today. Though the payment increase at the rate reset and amortization start date is substantial, Fitch believes that borrowers of 10 year interest only mortgages (IOs) have sufficient time to refinance the mortgage, sell the home, or increase their income before incurring the payment increase. This is also true for hybrid ARMs with a seven year IO.

‘Fixed-rate IOs present an even lower risk of default since there is no interest rate risk; the note rate remains unchanged for the life of the loan and the payment increase is made up of only principal’ according to Mistretta. ‘Fitch believes that performance is likely to trend closely to 30-year fixed rate mortgages (FRMs) and, therefore, depend primarily on the borrowers’ credit risk profile and other risk attributes such as the presence of second liens, documentation standards, occupancy and loan purpose.’

Fitch’s opinion is based on several factors. First, today’s fixed rate IO coupon rates are less than 10 basis points (bps) higher than 30 yr FRMs, so the borrower is not paying much more for the interest only feature. Also, the payment increase is smaller than the amount from the rate reset and occurs after 10 years.

MSN Money recently ran an article that compared on-line AVMs against actual sales of properties in seven cities. Two properties in each city were used.

The complete article can be found here, but why make you wait for the results…

“And the winner is . . .

At $29.95 for a report, Electronic Appraiser is not cheap. But it appears you get what you pay for — a full report with mapped (but not interactive) comparables, a rundown of census data for the county, including contact information for schools, churches and businesses — and a roughly 50% chance that your estimate is within 5% of the likely sales price. Being right just half the time might get a human appraiser fired. Yet, in the world of online AVMs, this is top performance.”

1SourceData - Online AVM

QUICK VALUE AVM SERVICES

AVM’s answer the question, “What is this property worth?” But they do it faster, and they save the borrower hundreds of dollars. Blogger note: This is the company line. As a professional appraisal there may be many times when an AVM will save you a few hundred dollars on an appraisal fee and cost you thousands if you make a decision based on the value estimates developed by the model.

The 1Sourcedata AVM takes about 30 seconds to confirm a loan to value ratio.

According to the company website:

They are accurate enough that many lenders accept AVM’s as a replacement for appraisals. Fannie Mae and many others use AVM’s in their quality control processes. And they are often used to complete and underwriter’s desk review.

1 Source Data is committed to supplying the most accurate and cost efficient AVM’s in the industry. Our FirstClose gateway currently offers AVM’s from eight different vendors, and that number is increasing. You can order accurate residential property valuations, for properties in more than 2,300 U.S. counties, and have them delivered in seconds.

Cascading through AVM’s can make your life even easier. We are one of the few AVM providers to automate the process of getting values from a group of vendors. You select the vendors and our platform will search the list until a value is found. Blogger note: Does this mean they will continue searching the available AVMs until the value you want is found or until one of the AVMs can produce a value - any value?

And more functionality is in development. Value Sensitive AVM’s will let you find the AVM with the highest value, or the value closest to the sales price. And Merged AVM’s will select and then ‘merge’ the findings of a group of AVM’s. You pick the AVM’s; you determine the number of AVM’s; you control the process. Blogger note: This also concerns me because an appraisal developed by an ethical and competent appraiser will not provide the highest value or the value closest to the sales price - but the market value.

As always, caveat emptor. Are you willing to risk the biggest investment of your life to a valuation tool that may be off by a significant amount? In the home buying/selling process, the appraiser and home inspectors may be the only disinterested 3rd-parties in the transaction. We are there to give an unbiased opinion of value - to protect your interests.

Automated Valuation Model

CoreLogic’s first cascading AVM tool revolutionized mortgage lending by offering a solution that delivered higher hit rates and greater accuracy than possible from a single AVM. Over the years, CoreLogic has continued to develop and refine the cascade model, constantly improving hit rate and accuracy to deliver a functional, dependable automated valuation tool. AVMSelect™ cascades over up to 15 of the country’s most respected AVMs with a hit rate of nearly 90 percent, surpassing individual AVMs by at least 15 percent.

AVMSelect features geopreferencing, an innovative approach that dynamically ranks AVM selection in the order most likely to deliver accurate valuations for each geography. CoreLogic’s independence ensures that AVMs are selected impartially in rank order, based solely on choosing the best-fit AVM for each property. The system also enables company-wide consistency by allowing clients to configure specifications based on corporate guidelines and business rules. In addition, AVMSelect provides easy access to additional property tools that supplement AVM returns.

AVMSelect can be delivered through a secure Web-based interface, batch processing, or direct XML integration into an institution’s production system.

download the AVMSelect product sheet

View more info about AVM’s

Financial institutions can use cascading AVM models to increase hit rate while maintaining and even increasing accuracy compared to single AVM models. Applying a set of statistical performance measures and utilizing these statistics in a rank-ordering model that is guided by a goal of maximizing accuracy allows a financial institution to use this technology without unwarranted model-risk exposure. The statistical nature of both the AVM performance analysis and the rank ordering of the AVMs in the cascading model results in a model that is well defensible to regulators and risk management within the financial institution.

Identity theft and other borrower-based fraud techniques are becoming increasingly more sophisticated, exacting a much greater toll on profits for mortgage lenders. Compliance and misrepresentation tools alone are no longer adequate to address these threats. In response, CoreLogic, the leading provider of mortgage risk assessment and fraud prevention solutions, has developed IdentityPro to help clients better manage borrower fraud. IdentityPro assesses a borrower’s likelihood to commit the type of mortgage fraud most likely to cause financial loss by using state-of-the-art behavioral analysis that reveals suspicious patterns.“It’s a more robust engine than other products out in the marketplace right now, because it goes beyond the basics of Social Security number verification and identifying misrepresentation.” said Felice Kesselring, director of product development for CoreLogic. “It diagnoses a borrower’s buying and living patterns, looking for the type of activity that can be correlated to the risk associated specifically with fraud for profit.“

IdentityPro works by modeling borrower transactions and other relevant data to more precisely determine borrower risk. In addition, IdentityPro includes compliance and misrepresentation capabilities to spot identity theft, straw borrowers and owner-occupancy misrepresentation. It promotes proactive risk management practices, quickly identifies then minimizes borrower-related loan risk, stops fraudulent loans before they are funded, accelerates decision making and lowers operating costs.

“We can detect patterns that are correlated to flipping activities and higher risk loans giving the mortgage lender a broader base of information about an individual loan or a loan pool. This information enables them to adjust their lending practices accordingly,” said Kesselring.

Lenders can increase production and pull-thru rates, streamlining the approval process by applying IdentityPro during loan application, underwriting or pre-funding review to spot a borrower’s living, buying and selling patterns. The easy-to-use report ordering interface and reports provide alerts for questionable activity including transient behavior, owner occupancy, property value change and Social Security number activity. These alerts and flags act as guideposts to speed review and decision-making.

“In an environment where real estate fraud has become one of the mortgage banking industry’s most destructive concerns, our goal is to offer lenders a more efficient and certain path to isolating borrower risk with the highest potential for impacting loan loss,” said Anthony Romano, Executive Vice President, Sales and Marketing for CoreLogic. “Using IdentityPro, lenders can reduce write-offs due to early payment defaults, prevent identity theft, expand production capacity without increasing staffing, offer better prices and reduce or avoid loan origination costs.”

Key borrower management components of IdentityPro are included in CoreLogic’s LoanSafe™ product suite. LoanSafe delivers a 360-degree assessment of collateral risk by simultaneously evaluating the agent, the borrower and the property.

About CoreLogic:

Sacramento, Calif.-based CoreLogic is the leading provider of collateral risk-analysis and management technology and services to the U.S. mortgage banking industry. Since 1997, the mortgage industry has relied on CoreLogic to enable risk management and workflow process support. Using CoreLogic technology, mortgage originators and investors are able to increase profitability and loan quality by making more informed lending and investment decisions. The CoreLogic suite of property information tools provides the data, comprehensive geographic coverage, ease-of-use and accessibility the mortgage industry needs. For more information about CoreLogic, visit www.corelogic.com.

John Cirincione, SRA posted the news on the aiforum that the Kansas Governor signed into law House Bill 2735. I want to thank John for the heads-up. Below is my summary and thoughts.

A Kansas billed was signed into law this week that did a couple of interesting things as related to the world of appraising. First it provides that appraised value can be estimated through the use of an AVM:

Under the new law, appraised value can mean “the estimated market value determined through an automated valuation model acceptable to the administrator.” House Bill 2735 will change the state’s Uniform Consumer Credit Code to define “appraised value” as a value produced by an automated valuation model.

(The) new law also provides that “an automated valuation model provider shall not accept a property valuation assignment when the assignment itself is contingent upon the automated valuation model provider reporting a predetermined property valuation, or when the fee to be paid to the automated valuation model provider is contingent upon the property valuation reached or upon the consequences resulting from the property valuation assignment.”

And all along appraisers have been told that AVM’s are not appraisals. A quick review of Advisory Opinion 18 (AO-18) provides the following:

An AVM is a computer software program that analyzes data using an automated process. For example, AVMs may use regression, adaptive estimation, neural network, expert reasoning, and artificial intelligence programs.

1. does not alter the input or affect the output of the AVM, and
2. does not communicate his or her own appraisal, appraisal review, or appraisal consulting opinions or conclusions regarding the AVM’s output.

Has the State of Kansas erred in this situation? What impact will this have on appraisers in that state?

The second part of the bill is also very interesting. Take a look at this:

The bill prohibits a lender or any person acting on behalf of a lender from disclosing to an appraiser or other person engaged to determine the appraised value of real estate the amount of a proposed real estate loan or the preferred or required value of any real estate intended to secure such loan.

This may actually be a good provision in this bill. Appraisers are still required to develop a property history where existing contracts, sales, etc. must be analyzed and I see nothing in the bill that precludes the appraiser from knowing the contract price, but hopefully this will begin to limit some of the pressure applied to appraisers. What are your thoughts?

Fidelity National Information Services is expanding its property valuation services to the Japanese real estate market, the company said today, providing its automated property valuation tool in that country.

Fidelity will provide Japanese mortgage lenders, secondary market participants, and consumers with ValueSure, its automated property valuation tool, with New City Corporation acting as both the data supplier and the marketer of this service in Japan, Fidelity said.

This product will initially service the Greater Tokyo area with the same type of property valuations and analytic tools available in the United States, and plans for expansion to other major metropolitan areas in Japan are underway, Fidelity said.

“We have always had a vision of offering our real estate automated valuation solutions and analytic products globally,” said Brian Hershkowitz, president of the Mortgage and Information Services division of Fidelity National Information Services, in a statement.

“With access to high-quality property sales data from our partner New City Corporation, we were perfectly positioned to enhance our proven technology to provide the Japanese real estate market with the same valuation efficiencies as in the United States,” Hershkowitz said.

“New City is delighted to offer the ValueSure solution in Japan in partnership with Fidelity National Information Services,” said Peter Meyer, chief operating officer of New City Corporation. “ValueSure provides a cost-effective alternative to traditional appraisal and, with its reliable, real-time, high-volume capability, is ideally suited to the needs of the burgeoning securitization market in Japan.”

whatpricemyhouse.com free home valuations online

Well not that this be of any use to many in the States, I found this website which touts the ability to give a home value estimate for properties in Australia or New Zealand. Name may not be proper English (pardon me to do have any Grey Poupon?) or roll off the tongue as well Zillow which provides “Zestimates”, but for those Down Under or of Kiwi lineage, this may be a quick resource to check.

For the first time in eight years, the overall U.S. housing market is experiencing a rare balance between home buyer demand and home seller supply, according to HouseHunt’s latest “Current Market Conditions” quarterly survey.

As a disclaimer on the site, HouseHunt and associated companies provide only advertising space to participating real estate agents and brokers. All current marketing content of real estate conditions and trends is provided by the participating local real estate agents and all market trends and reports compiled by these real estate agents should be independently verified.

I’d recommend taking a look at the linked report above and while you’re at it, take a gander at their website. There are markets reports for many individual cities as well as an on-line home value model at www.homevaluehunt.com.