Valuation Tool Helps Banks Comply with AVM Requirement

The crisis has turned property valuations into one of the biggest challenges for the mortgage industry, especially for managers of bank-owned properties feeding demand for valuation tools.

“REO managers have a critical need to understand property values,” says CoreLogic product line manager of collateral solutions, Susan Allen. All property valuation models “need to make assumptions about variables that they do not know,” but automated valuation models make an assumption about the property condition that “contrary to popular belief,” do not assume that a property is in average condition.

She argues that if the same as broker price opinion valuations and appraisals, AVMs use information on neighborhood sales to estimate value based on property characteristics—differently from most property condition reports AVMs do not offer an “average” subjective condition rating.

AVMs assume a property is in similar condition to its neighbors “and there are no material externalities impacting marketability,” Allen says. It means a property in “average” condition located among newer homes compared to one located next to a waste treatment facility “would not be a match for AVM assumptions.”

The goal of OnSite—a new tool designed to provide a property condition report along with local market information that complements AVM reports and complies with the new Interagency Appraisal and Evaluation

Guidelines for lenders and servicers—was to eliminate that discrepancy. Its patent-pending condition rating system provides a consistent and transparent assessment of the property condition based on a list of inspection questions “developed and tested with the objective of confirming these two assumptions separately.”

CoreLogic tested the formula by sending multiple inspectors to the same property and then noting “discrepancies in results.” Training materials reflect the feedback. Questions were reworded and retested until “solid consistency among inspectors” was achieved. REO managers can test the accuracy of the AVM down to the county level using either their own reviews or the CoreLogic quarterly model performance reports to see whether there is consistency of professional opinion. “There’s nothing more frustrating than having to reconcile diverging professional opinions on the same property,” Allen said.

The OnSite rating includes inspection results on the external factors affecting the subject property and information about the immediate neighborhood and local market conditions. It may be used as a standalone report or alongside any AVM, as required for regulated banks.

Another strategic advantage is the CoreLogic database. It consists of information about mortgage applications, fraud, property taxes, valuation, flood determination, and geospatial analytics and services. Data covers up to 98.7% of the mortgaged parcels in the United States. 

While “only regulators can opine about whether or how occupancy should be addressed in the establishment of an evaluation,” Allen said, OnSite provides a section on occupancy in addition to other information. It helps REO managers “determine whether the property suffers from condition issues” that often can be corrected or marketability issues that cannot be rectified, she said. 

According to Craig Focardi, senior research director at The TowerGroup, to comply with new federal guidelines lenders and servicers have to rely on solutions that combine trained observations from field inspectors with local market information and analyses.