Automated Valuations Remain Rare in CRE World

The use of Automated Valuation Models in home appraisals has taken off, but they are at a preliminary stage of use when it comes to commercial property valuations.

Essentially, this is technology that assesses the value of a property through the use of a defined valuation model.

AVMs "in their crudest forms" started to emerge in the early '90s and they became more improved by the mid-90s, according to Terry Loebs, vice president of Cambridge, Mass.-based Case Schiller Weiss, a Fiserv business unit whose proprietary AVM, Casa, is used for residential property valuations.

Mr. Loebs said, "Today they have begun to reach critical mass, with, by some estimates, being used in typically 10% of all residential mortgage applications."

Currently, the residential AVM market has about 20 contenders, with about five that have "any meaningful market share," according to Mr. Loebs.

Casa itself was introduced commercially in 1995 and the model was called "individual property valuation," at the time, he recounted.

Currently, the model is used in a variety of situations, ranging from a "move-in appraisal" to augmentation of the quality control processes of lenders to ensure that "the quality of the collateral valuation documented in the appraisal is sound."

To determine the estimated selling price of a property, CSW uses various modeling and regression techniques.

"Among other things that those analytics add to the Casa results are compensation for the data lag that is inherent in the data collection process," Mr. Loebs said.

In order to ensure that the data used in the valuation model is current, CSW constantly calibrates Casa.

"Market dynamics are subject to change, the quality and completeness of data within a particular market that might affect an individual property can change," Mr. Loebs noted.

The model is most widely used in the states with the highest volume of home loan originations - California, Washington, New York, Massachusetts, Connecticut and Ohio.

There are certain markets where the data is not fully complete, Mr. Loebs said, but "the (Casa) technology is sophisticated enough to know at what point it would be otherwise pushing the data limits." A Casa estimate is generally within no more than 7% to 9% off the correct estimate, according to him.

A shortcoming of any AVM is that "there is no onsite inspection and there is no way that any machine or database is going to know if the house burned down yesterday."

As well, Mr. Loebs said, "To the extent that substantial or recent improvements were made to the subject house, that hasn't been captured by one of our data sources, we are not necessarily going to know about those improvements.

"So as a result of that, there will be, depending upon the overall mortgage risk, always demand for the human touch or a more traditional valuation approach. One of the keys to successful AVM implementation is getting your arms around some of these limitations."

CSW was acquired by Fiserv in the last year and the integration has gone well, according to Mr. Loebs.

"Now that CSW is a unit of Fiserv lending systems and services group, we can work hand-in-glove with our group partners to deliver integrated mortgage lender solutions," he noted.

Industrywide, one of the "bigger issues" relates to data, specifically, the sourcing of more and better data in certain markets.

Another issue that people are "watching carefully" relates to the use of AVMs by the government-sponsored enterprises and how they will go about accepting AVMs for mortgage loan applications, if at all, Mr. Loeb said.

Currently, Fannie Mae and Freddie Mac are using their own proprietary AVM technology "bundled within their respective automated underwriting systems."

"They (the GSEs) do not at this time accept third-party AVMs unless a lender is willing to sell loans to them with recourse," he said.

And then there are issues relating to collateral scoring - "how predictive can those scores be and who is in the best position to make that happen."

Emerging issues relate to "forms of product enhancement," such as insured versions of AVMs and different types of fraud detection devices built into the AVMs.

Mr. Loebs expects the residential AVM industry to make "significant progress" in the next year-and-a-half.

"It is unfolding, with various Multiple Listing Services who are potential AVM data sources that will augment the value proposition of the better AVM technologies. There will be a collateral score developed that will get a lot of market traction within the next two years."

He expects the market penetration of residential AVMs, which is currently 10%, to reach as high as 50% within the next two or three years (including demand for portfolio due diligence and appraisal quality control, in addition to originations).

On the commercial side, the first generation of "predictive valuation technology" has been available only for a brief while.

At the MBA's Commercial Real Estate Finance/Multifamily Asset Administration & Technology Conference here, at a panel session on AVMs, panelists (all of whose companies have proprietary models for commercial property valuations) discussed why the appetite for the technology has grown on the commercial side.

William Quadrini, director, Reis, noted that on the residential side, it is possible to get credit decisions in seconds with AVMs, with a "very high degree of accuracy" and that the commercial market has been looking for a similar tool for a long time.

Seeing that appraisals have a six-week lead time and an accuracy rating of 90%, Mr. Quadrini sees the use of AVMs as a "tremendous opportunity for efficiency."

Over the next few years, he expects automated valuations as a tool to evolve rather than their being accepted "as a Holy Grail."

Randy Fuchs, senior vice president, GMAC Institutional Advisors, noted that while residential AVMs have been around for 10 years, on the commercial side the industry is still "at infancy."

He believes that there are both supply-side and demand-side reasons for the increasing popularity of AVM technology.

There is pressure and challenges from regulatory bodies on the demand side, he said, while on the supply side, "there is a bunch of vendors that has seen success."

While it is "inherently easier" to come up with results on the residential AVMs and it is more challenging on the commercial side, he expects the situation to change, with some effort, in the next few years.

Mr. Fuchs doesn't believe that AVMs can fully replace human appraisals, seeing them as supplementary.

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