Automated valuation models are literally a weighty issue when it comes to the effect of distressed properties on a market: the impact of properties in foreclosure on surrounding healthy properties can determine whether a mortgage can be refinanced or a property sold at a profit.
“The problem with AVMs is they’re a black box, you don’t know what’s going on inside of them,” says Ric Miles, CEO of IntelliReal. “If they spit out values that aren’t justifiable, AVMs can do a lot of damage.”
IntelliReal, which has about 50 mortgage lending clients, recently added a new “distressed” feature that extends its AVMs to extract and weigh data points that indicate whether a property is considered distressed within its proprietary “iValue” model, in effect separating distressed properties and one for healthy properties.
IntelliReal’s database accesses hundreds of multiple listing services (MLSs) each day, and its software searches for key words in listings that can determine if a property is in a state of distressed. The search is designed to identify and flag properties that are in default, company owned, abandoned or being sold at auction. Additionally, neighborhood analytics are used to search and select area listings that can be identified as distressed, allowing the AVM to utilize relevant comparables. The methodology also isolates and monitors price trends for distressed properties in a local market, a function designed to accurately establish the spread between the “normal” retail market value and distressed value.
“By tracking distressed properties, we are creating a new trend line, so we can treat distressed properties under a different set of rules and establish a trend line between retail and distressed properties,” Miles says. “That’s going to affect the haircut between a retail and distressed property.”
The upgrade, which is now standard on the firm’s AVMs, is designed to avoid what Miles calls “friendly fire,” and what mortgage lending experts such as University of San Diego professor Norm Miller calls a “contagion effect.” Whatever it’s called, lenders are worried that healthy borrowers are being shut out of second mortgages, home equity loans and refinancings because AVMs are inaccurately applying downward pressures to homes in neighborhoods with high foreclosure rates.
IntelliReal’s rivals in the AVM space, firms such as Applied Analytics and First American, are also adding new elements to their AVMs—such as local employment and income trends, inflation, mortgage fraud and other economic factors—that attempt to isolate healthy properties from distressed loans. One of the goals across the AVM industry is to move beyond the inertia created by legacy valuations that are heavily reliant on median prices in a market, which can skew individual values in an unhealthy direction, a phenomenon that’s been seen both during the market run-up and the crash. “As the median price goes down, it starts to pull everything down with it,” Miles says.