Index Tool Measures Home Prices & REO Sales

Jacksonville, FL-At least one expert finds the foreclosure crisis has created demand for improved housing valuation and pricing tools that allow for more intelligent and sustainable business decisions.

Nima Nattagh, senior vice president, Lender Processing Services, Applied Analytics, told MSN there is a growing need for better tools, better data and automated valuation models that are more regionally based. It is pushing technology solutions providers to create more exclusive tools that can analyze statistical changes in home values and forecast future trends in housing prices.

Mr. Nattagh says one effect of the increase in foreclosure and REO activity is the uncertainty about the ability of existing tools to adequately capture the extent of that impact. "The appraisal and the valuation industry do not really have a standard in addressing these kinds of situations."

The market needs tools and statistical models that "can slice and dice" specific data groups, he said. For example, the newly developed LPS home price index has shown that the downturn in the market "is very much a regional story."

One way the index further differentiates market developments is by including or excluding REO property sales for a more in-depth review. Properties are analyzed geographically and at the ZIP code and property-type level, he said, unless a specific area of the market does not have enough numbers of observations to produce a reliable index. Data are gathered directly from the county recorder to capture and understand the nuances of the data that go into the AVM. Markets are going through rapid changes that have generated hunger for information, tools and models, he said. Most information sources built in the past six to seven years geared towards appreciating markets, so they do not necessarily facilitate the development of tools that reflect the current crisis.

Asset valuation remains a challenge as lenders constantly face the dilemma of whether they got it right. Another challenge is competition. According to Mr. Nattagh, LPS has internally developed the metrics that allow index data users to compare their performance to the overall market and other firms. There is "some significant investment capital waiting in the wings" for the right moment to acquire distresses assets.

"Obviously today the question is: Are these investors, such as hedge funds, in the mood to buy?" More sophisticated valuation tools can help change their mood in decision making, which is why, he says, asset managers, investors and even regulators need these tools and "information that helps separate fact from fiction."

According to Mr. Nattagh, the LPS home price index revealed that, in general, between 2007 and 2008 markets that experienced sharp drops in home prices in 2008 also saw deeper REO discounts. The index helped quantify that gap where the largest drop in home prices of REO sales was observed in Riverside County, Calif., falling by 28% in 2008 and compared to 2007 it fell by up to 34% when including REO sales. The ability to differentiate between the general trend in home prices and REO sales, Mr. Nattagh says, allows the industry to more accurately price REO properties and monitor the health of the housing market.

More specifically it found the gap between home prices with and without REO sales was smallest in Seattle, New York and Cambridge, Mass., "offering further evidence that the current downturn in the housing market is regional," he said.

If the LPS index is one of the first tools to separate REO sales vs. non-REO sales, "it's a matter of time until competition catches up," he said, and everyone is looking for better tools in both originations and servicing.

In a rapidly changing market the best decisioning solutions are tool mixes that combine AVMs, statistics and human judgment, or intervention, he said. Particularly in the case of REOs where the condition of the property plays such an important role in the valuation of the property, it would be unreasonable to expect one AVM, no matter how sophisticated, to suffice. The most successful tools mix analytical and statistical models with manual valuation processes that include a broker price opinion, a drive-by appraisal, or a full appraisal.

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