Market Data Analysis Maximizes Value

The quality of a given real estate market -- whether appreciating, stable, or declining -- has a direct impact on the variance between fair market value and REO or institutional value for properties in that market. With defaults and foreclosures on the rise nationwide, it's important lenders have the best valuation information possible to facilitate better default and REO property management decision-making. By understanding market conditions as they relate to the properties in its portfolio, the lender stands a much better chance of maximizing the price for REO properties and identifying markets that require closer attention.

In appreciating markets, a minimal variance between fair market and institutional (REO) value tends to exist. In stable and declining neighborhoods these values can be significantly different which leads to a bifurcated market. As prices decline (due to numerous factors) and as the number of REO properties increases, the discount rate between true arms-length transactions and institutional sales tends to increase. Knowing the anticipated discount rate on institutionally owned properties in a market gives lenders the ability to act quickly and decisively.

The difference between a 10% and 70% valuation discount on an institutional property can amount to a loss -- often unnecessary -- of thousands of dollars per property. Applying a standard discount on every institutionally owned property in a portfolio is not granular enough and can lead to extended marketing times that in turn lead to greater carrying costs. Being able to accurately project the valuation discount "sweet spot" and understanding price forecast trends for a neighborhood can make for quicker and less costly REO disposals.

Data Access is Key

Data currently available to lenders and servicers from their technology partners can provide a clear picture -- sometimes down to a ZIP code level -- of where entire portfolios and individual properties fit within their respective markets. By tracking sales of both open market and institutional properties, data become available on prices for types of sales, overall market trends and the average length of time-to-sale.

Without such data, lenders are left to base their REO listings on one or two opinions of price. These opinions can be quite accurate, but they can also be biased by numerous outside influences. Having access to a wide range of unbiased market information gives the lender an accurate projection of institutional (REO) value on a property based upon hard and fast statistics.

Detailed market data allow the lender to perform much stronger due diligence on broker price opinions or appraiser-based valuations. Data from trusted technology providers will have been well tested for accuracy and provided at a detailed enough level to accurately forecast discount rates and institutional values and give the lender a baseline from which to work. If, for example, the data shows a 22% variance in institutional values for a particular market, and the BPO shows a 40% discount from fair market value, that BPO would immediately be suspect. Conversely, if data show a 40% variance in institutional values for a particular market, and the appraiser-based valuation shows a 10% discount from fair market value, that valuation would also be called into question.

To manage operations effectively and get the best possible return on REO properties at sale, lenders must examine their portfolios to get an idea of the current valuation on the properties. They must also understand what discounts look like from neighborhood to neighborhood, what the value change will be over time and what the ultimate downside is in terms of institutional valuation. As markets decline, there is a greater potential for a downside push than in an appreciating market.

Time Is of the Essence

In an appreciating market, the lender is typically more willing to restore or make improvements to an REO property before it goes on the market to get a better sales price. In a declining market, on the other hand, as REOs and defaulted properties continue to mount, driving values downward, servicers and asset managers become less willing to pour more money into a property. The key becomes to dispose of the property as quickly as possible, for the lowest possible discount from fair market. The longer a property remains on the market, the more difficult it becomes to be sold at a fair price. When lenders use empirical data to place a properly discounted -- but not overly so -- REO property on the market, it becomes that much easier and quicker to sell, saving the lender money on property preservation costs. The ultimate goal is to use detailed statistical information to price the property correctly, and if in foreclosure, to dispose of the property quickly.

A Window Into Your Portfolio

Having access to this data, lenders and servicers gain a clear understanding of individual market trends in different markets, and a greater awareness of which markets have higher discount variances. Moving forward, the lender is also in a better position to foresee how the market and prices will react to fluctuations.

By performing analysis of their portfolios against these data, lenders gain an accurate assessment of their potential exposure. Looking specifically at those portfolio properties already in default, such analysis gives the lender a view of the potential loss, allowing him/her to focus efforts on trying to resolve high-risk asset loans. For properties already in REO possession, the lender can ensure proper valuation and also make an accurate prediction of how long the property will take to sell based on historical market data for that particular neighborhood. The ability to accurately project the institutional value discount variance gives lenders a much stronger foundation for smart decision making with regard to sales price, market timing, default resolution and portfolio holdings. Now that the market is producing formidable new challenges for REO management and sales, the value this brings to lenders and servicers has never been higher.

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