The mortgage industry is looking beyond the two major home price indexes for more granular data to get a handle on where prices are heading in specific markets.
The use of such indexes goes well beyond macroeconomic forecasting. Loan servicers are starting to consider the data when making decisions on whether to modify loans, allow short sales, or foreclose. Units that dispose of repossessed homes are incorporating the information into how they price inventory. Buyers of distressed assets use the indexes to arrive at values for "scratch and dent" loans.
Risk managers say the current downturn has laid bare the constraints of the former Office of Federal Housing Enterprise Oversight's House Price Index, and the much-respected S&P/Case-Shiller Home Price Indices. Several vendors have introduced alternatives.
"Whether you use OFHEO or Case-Shiller, they are directionally consistent, but not accurate down to the loan level," said Dean Di Bias, a vice president and portfolio manager at Advantus Capital Management Inc. in St. Paul.
Fiserv Lending Solutions of Boulder, Colo., which provides outsourced loss-mitigation services to Countrywide Financial Corp. (now a part of Bank of America Corp.) and other servicers, uses home price indexes "to identify which borrowers to contact so we can modify loans," said James L. Smith, the executive vice president of portfolio services at the Fiserv Inc. unit.
"By the time a property goes into foreclosure, the price will have dropped further, and that's why these indices are so important for pricing in a depreciating market," he said.
Kyle Lundstedt, the managing director of FIS Applied Analytics, a San Francisco unit of Fidelity National Information Services Inc. of Jacksonville, Fla., said data is one of the few tools available to determine which borrowers should get principal writedowns — and by how much.
"The price of a loan is going to be different if I have 10 or 20 other houses in the same neighborhood in foreclosure or REO," Mr. Lundstedt said. "So the chances of doing a short sale or settling for less than the principal loan balance would be justified."
Case-Shiller "will tell you what the change in price has been from last month," he said, "but if you're worried about a loan that is already 90 days delinquent, you have to figure out how long it will take to dispose of a property and at what price if you have to take that loan in."
To that end, FIS Applied Analytics is developing a Neighborhood Watch index, which is expected to be rolled out this fall. It will combine property data with automated valuation models and provide a neighborhood-by-neighborhood home price forecast, Mr. Lundstedt said.
Mr. Di Bias, a former senior vice president of credit-portfolio management at GMAC LLC's Residential Capital LLC, said he uses the OFHEO index, despite its shortcomings, to gauge the probability of defaults in mortgage pools backing securities. "We don't use it as gospel, but we look at how the change in home prices affects the frequency and severity of defaults," he said. The data is "not surgically precise," so when a loan is in a late stage of delinquency, foreclosure, or repossession, the property value often declines far more than what the index predicts.
The OFHEO and Case-Shiller indexes use the "repeat sales" methodology, created in the 1980s by Robert Shiller and Karl Case, the founders of Case-Shiller Weiss Inc., to capture the change in value of properties that have been sold at least twice.
The government index, which is free, measures price changes from repeat sales and refinancings of single-family properties whose mortgages were bought or guaranteed by Fannie Mae or Freddie Mac. Because the index is limited to conforming loans, high-priced homes are excluded.
Case-Shiller measures the value of single-family housing in 20 metropolitan areas but lags the market by two months because it collects data from public records.
The providers of the major indexes acknowledge their limitations.
"Everybody who uses these indices has to carefully examine what they're using them for and what will work best for them," said Patrick Lawler, the chief economist at OFHEO, which is being combined with other regulators to form the Federal Housing Finance Agency.
Fiserv, of Brookfield, Wis., bought Case-Shiller Weiss in 2002 and publishes the indexes in partnership with Standard & Poor's Corp. Cameron Rogers, a senior vice president at Fiserv in charge of the indexes, said they cover 351 of the country's 3,200 counties and 3,200 of its 32,000 ZIP codes, and capture 75% of repeat sales.
Still, Fiserv plans to add more ZIP codes and counties to the index by yearend, and the company has partnered with Moody's Economy.com to create a monthly forecast, he said. In February, Mr. Smith's outfit created its own index to help lenders predict how mortgage portfolios will perform by sorting loans into various risk "buckets."
Mr. Case, the Katherine Coman and A. Barton Hepburn Professor of Economics at Wellesley College, said in an interview Tuesday that there is "massive variation at the zip code level" and cautioned financial institutions against using any index to price loans.
"If you want to use these indexes accurately, you have to have more granular data," Prof. Case said. "You probably shouldn't be using the indexes to mark-to-market loans."
A more recent problem, he said, is that auction sales of foreclosed properties are skewing the data in certain markets such as Phoenix, making it difficult to determine accurate prices.
First American CoreLogic, a San Francisco unit of First American Corp. of Santa Ana, Calif., produces several home price indexes that claim wider coverage of 7,569 ZIP codes and 676 counties.
Servicers are "really getting into the weeds," said Damien Weldon, a vice president of credit risk products and analytics at First American CoreLogic. "In today's market, loss severity is dominated by the risk of a loan going delinquent, so servicers are looking very closely at local real estate trends on the ZIP code level."
Eric Miles, the chief executive of IntelliReal, a data and valuation provider based in Denver, said the OFHEO and Case-Shiller indexes "are being stretched" for purposes they were not originally intended for. "Where the trouble begins is when these high-level indexes are used for decision-making at the individual loan level," he said. "In volatile markets, as we have today, assuming consistent price changes is a bit dangerous."
His company has teamed up with Integrated Asset Services LLC, a default management firm in Denver, to create two indexes. One measures monthly changes in median home prices with data from 360 counties. The other uses data from the past six quarters to project future home prices for 15,000 neighborhoods smaller than the ZIP code level.
