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S&P Puts Focus on Valuations

Standard & Poor's Rating Services, New York, said it is reiterating its criteria for the use of alternative property valuations in U.S. RMBS deals because assessing the market's strength or weakness is only one factor that needs to be considered when evaluating potential loss severity. An even greater factor, S&P said, is the quality of the property evaluation.

S&P said that based on long-term data, it has incorporated "over 10,000 adjustments" in its ratings analysis to account for performance variations, which shows that a simple arbitrary adjustment to home values may not capture the potential impact to loss severity.

More specifically, the criteria considered by S&P in ratings analysis according to a recent company release is "the use of alternative property valuations including automated valuation models and their potential effects on loss severity" an assessment method used since 1998. S&P notes that consistently throughout all of the tests conducted, "performance has varied dramatically among the systems when accuracy is determined for specific geographic areas, property types, sales price tiering and other relevant factors."

Besides determining the accuracy of AVMs, S&P has incorporated its Housing Volatility Index in its "LEVELS Model," an index that has been included in the criteria during the last five years to calculate the volatility of home prices in a given metropolitan area and determines the probability of house-price decline.

The HVI results are then used to adjust the market value decline for both increases and decreases by property rating category.

Automated valuation models, or AVMs, provide an estimate of a home's market value based on statistical data about the property and the location without actually requiring an appraiser or real estate professional to visit the site.

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