A Need to Improve Validations of Valuations

There is a strong need in the mortgage industry to validate valuations on REO properties so lenders can have confidence that the valuation they have is legitimate and accurate, according to John Walsh, president of MDA DataQuick in San Diego.

Appraisals, broker price opinions, and automated valuation models, are useful tools but they should all be verified, said Mr. Walsh, who works for a division of MDA Lending Solutions that provides property and real estate data. “There is a lot of talk about the problems specifically with AVMs,” said Mr. Walsh. “The majority of the problems we are in today were not created by AVMs. Most of those subprime loans that were made and are now problems — most of the distressed loans are now in REO. They had nothing to do with an AVM. All of those loans were funded based on a real appraisal. ... It was not an AVM issue.” Today, Mr. Walsh thinks all three — AVMs, BPOs and appraisals — have their respective shortcomings. “AVMs lack the in-depth local industry analysis that an appraiser or a Realtor can provide to the valuation. Conversely, a BPO and an appraisal lack the analytical solution an AVM brings to the market.” One of the dilemmas is that once a lender gets an appraisal, BPO or AVM, especially on REO properties, they have no confidence that value is right, he said. “They have to review every single one.”

MDA DataQuick offers a service called Collateral Validation that is an automated review of any valuation. While other companies have also come out with similar products, Mr. Walsh says the longer-term solution is likely to be an analytical-based appraisal such as the one his company has been testing. That means having an appraiser start out with an AVM or some other data-driven value and building on that or disagreeing with it.

“The appraisal lobby is strong enough I’m not sure if that’s going to happen anytime in the near future,” he said. “The alternative is to provide lenders with analytical and data-driven solutions to test those valuations, whether it’s a BPO, appraisal or an AVM. All on their own, they are insufficient, and lenders need something else to review them.”

Given the vast number of REO properties on the market, it is critical that there be a more auditable process. The challenge for a lender to price the REO accurately is gigantic, he adds. “If in fact the lender sets the price too high, they have problems of carrying costs of continuing to own the product, and they also have the issue of trying to chase the market down. If they get the wrong value on the low side, they risk selling a property for substantially less than what they can get for it. It is more important than ever before to adequately judge what the market is and to be able to sell this home at the best possible price,” said Mr. Walsh.

So far, industry adoption has been relatively low but some lenders are starting to use these tools. “We are trying to change something people have been doing for 40 years. All these things have been manually reviewed. Doing something new always takes time.”

If lenders price REO real estate correctly, even in today’s market, the company’s data show people will buy. “Real estate sales are up for last nine months in both Northern and Southern California,” said Mr. Walsh. “If servicers, investors and lenders do not get the right value on a property, they are precluding a first-time homebuyer to get in there.”

The difference to appraising an REO property vs. a typical home is the motivation of the sale, said Greg Dennis, vice president, Collateral Valuation Solutions for MDA Lending Solutions. When completing a REO appraisal, the bank is using the information to evaluate their position and determine what steps should be taken in order to liquidate the property. “This generates an increased focus on the condition of the property, and the need for potential repairs to make the property marketable,” said Mr. Dennis.

In many markets, the density of REO properties is materially impacting the value of other houses in the same area. In other markets, the density of REO properties does not have this same impact, and the appraiser needs to understand and incorporate that in their assessment of both REO and non-REO properties, he said.