The mortgage tech industry's been working feverishly to freshen the data cocktails used by automated property valuation models (AVMs) to meet industry demands for greater predictive acumen in an uncertain market. But with more downward-weighted recessionary factors now in the stew, it's the borrowers who may want a stronger drink.
Used by a vast majority of originators, servicers and capital markets participants, AVMs calculate probable selling prices via a Web browser by leveraging prior sales of similar properties in the local area, public record data and automated decisioning logic.
"AVMs were designed for normal and up market times, it's unclear how they are doing in a down market," says Richard Beidl, a San Diego-based mortgage consultant.
To provide greater clarity in the current downward-spiraling market, AVM providers such as LPS Applied Analytics, First American and Fiserv are adding elements similar to those found in collateral risk scoring (CRS) models, a product similar to AVMs which include more detailed macro economic data such as local employment, income, inflation, mortgage fraud and other similar factors.
But these expanded models also come with their own risks. One challenge is inertia - a recent downward trend in prices tends to result in predictions of future softness, and vice versa. "It makes it difficult to slam on the brakes on a market movement. The same thing happened during the run up as well," Beidl says.
Most large lenders are mum on how they are changing use of AVMs given the uncertain future of property values, though executives from the tech firms report an increased demand for added macroeconomic data as part of AVMs. "Our clients' needs are changing almost across the board," says Tyler Sawyer, svp of automated business lines for LPS Applied Analytics in San Diego. "They not only want the valuation, but the supporting information and the details on what's going on in the surrounding neighborhood that can affect prices."
Fiserv's expanded AVM, for example provides a current estimated value, a future value, distressed value and a retrospective value. It incorporates the firm's own modeling, the Case Schiller Home Price Index and forecasting tools that were developed specifically for Fiserv as part of a joint venture with Moody's Economy.com. The AVM also incorporates a model that updates a neighborhood's economic profile based in income, employment housing starts, consumer price indices and manufacturing data. "In regards to using an AVM or whatever approach you choose to take to access collateral value, what it comes back to is the tools support a decision process, but they don't answer the question," Cameron Rogers, svp, valuation services, Fiserv in Boston. "In an appreciating market the AVMs may have lagged the market a bit. In the appreciating market this lag didn't matter. People didn't worry about the collateral exposure, they were worried about getting deals done."
When REO Sneezes, Healthy Borrowers Catch Cold
Among the decisions lenders have to make is whether to include a local market's REO impacts on a non-REO sale in their use of AVMs, a decision that in theory could shut out relatively health borrowers from refinancing.
Norm Miller a University of San Diego professor who researches collateral technology, says in San Diego, for example, there's an $80 per square foot difference between sales of distressed and non-distressed residential properties, with some neighborhoods sporting foreclosure sales rates of more than 50 percent.
This gives rise to a "contagion effect," which can force down other the prices of "healthy" surrounding properties. If an AVM takes this contagion effect in account when valuing a healthy property, the valuation for a refi or home equity loan can be driven downward far enough to disqualify the borrower. "Anybody that has any kind of high-LTV loan is going to have a hard time. And most AVMs are not going to adjust for the transaction behind the sale," Miller says.
Nima Nattagh, a svp for LPS Applied Analytics, says the firm offers models that do and don't include REO as a weighing factor. "There is a place where you could argue that level of foreclosures in certain markets is such that by not including sales of REO in a valuation, you're not taking into account a major price correction," Nattagh says. "But given there is no standard definition of valuation practice, sometimes you run into controversies as to whether REO sales should be included."