Automated valuation
models can help improve loan quality and avoid risk
David Rasmussen, senior vice
president of operations, Veros As published in Scotsman
Guide's Residential Edition, April 2013.
Complying with the growing number of lending rules and
regulations has become more difficult for originators of all descriptions, and
that likely won’t change in 2013. The qualified mortgage definition and
loan-officer compensation rules are among the latest of a swelling crowd of
regulations coming out of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, but there are still other rules and regulations affecting the
origination sector that should not be overlooked.
Perhaps one of the least understood requirements that has
emerged over the past few years concerns the use of automated valuation models
(AVMs). These fast, inexpensive and consistently accurate reports are available
in great variety now, using many methods and indices to arrive at their
conclusions. They have become so prevalent and diversified, in fact, that
they’ve attracted the attention of regulators, although this in itself may come
as no surprise.
AVMs are long-established in the mortgage field, but a quick
rundown of what they are and how they work may be helpful to many mortgage
professionals. Data points — like sales trends, tax-assessment records,
multiple-listing service records, title records and other real estate statistics
— are gathered and crunched, most often using proprietary algorithms to weigh
their various factors and yield a computer-generated estimate of value. They
possess the virtues of being immediate, cost-effective and inherently objective,
as calculations occur independently of human intervention.
Uses
Although they’re not accepted generally as the primary
valuation method for purchase and refinance transactions, AVMs can be valuable
tools for backstopping primary appraisals and are used on many loan
modifications, portfolio analyses and home-equity lines of credit when
accompanied by a reliable property-condition report. They are used for
pre-funding quality assurance and post-closing quality-control purposes, like
monitoring appraiser performance and market trends.
Likewise, investors use AVMs to check origination-file
accuracy and to cue inquiries, repurchase requests and other risk-control
procedures. Servicers rely on AVMs to keep tabs on properties in their
portfolios, particularly when it comes to delinquent, defaulting and potentially
underwater loans.
In brief, AVMs can be helpful tools and often prove useful to
originators in their efforts to avoid buybacks and improve origination quality.
That said, there are dozens of AVMs to choose from, so how does a newcomer — or
for that matter, an experienced AVM user — determine the difference between a
good AVM and a bad AVM?
Specifics
Certainly, if an AVM provides unreliable estimates of value,
it can no longer be viewed as a useful tool in a mortgage decisionmaking
process. This is one of the main reasons for today’s regulatory requirements
around AVM testing and validation. Some AVMs are designed to perform in specific
geographic areas or under certain conditions, allowing users to address
particular strategies.
Given the variety of data sources, quality-control processes
and modeling approaches — combined with the tools’ importance in lending
decisions — it’s become necessary to evaluate and test AVMs for suitability and
accuracy. Lenders are held responsible for ensuring the models that they employ
are based on sound practices and provide consistency in performance. AVMs can
save mortgage bankers and lenders a great deal of money compared to more
expensive valuation methods like broker price opinions or backup appraisals, but
those savings come at the price of testing their applicability and accuracy on
an ongoing basis to stay compliant.
In the short term, AVM results should be reliable, using
models designed to fit a lender’s specific valuation needs. For instance,
mortgage banks in the Midwest would do well to select AVM providers with the
best performance in their market area rather than those testing better on
California properties. In the long term, the testing, validation and ongoing
monitoring of AVM providers must follow regulatory guidelines if a lender wants
to avoid costly and time-consuming audits.
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