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Using Collateral Assessment Alternatives in Declining Markets
The Collateral Assessment & Technologies Committee of REIPA Responds to Fitch Ratings
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DURHAM, North Carolina - May 4, 2004 - The Collateral Assessment and Technologies Committee (CATC) of the Real Estate Information Professionals Association (REIPA) consists of the nation's largest AVM developers. Sustaining members of this group include representatives from; AVMax, Basis100, Countrywide, DataQuick, Fidelity National Financial, First American RES, Fiserv CSW, Real Info, Inc., TransUnion Settlement Solutions, and Veros Software.
The primary goal of the CATC is to promote awareness of alternative collateral assessment tools and technologies and their derivatives. "Our goal, first and foremost is the education of industry communities interested in the uses, advantages and limitations of AVMs and other non-traditional appraisal alternatives," according to CATC Chairman and Veros Software CEO Darius Bozorgi.
Based upon the committee's educational mission, it feels compelled to comment directly upon recent statements made by Fitch Ratings in an April 15, 2004 press release relative to non-full appraisal alternatives including but not limited to; AVMs, drive-bys, and desktop review appraisals. Fitch concludes that, "under certain weakening housing conditions, any valuation method other than a full appraisal is likely to overestimate property value." A thorough examination of all collateral valuation alternatives should be performed in order to appropriately understand any risks associated with the full range of these choices. In contrast to traditional appraisals, AVMs have been subject to substantial testing, evaluation and analysis by many of the largest banking and lending institutions in the world. According to Fitch, it "has reviewed alternative methods of property valuation but has not engaged in any comparative tests of AVM models or insured valuation products."
Data Currency
In support of this theory, it states "Fitch believes that the risk of property over valuation is particularly great in declining markets. In Fitch's opinion, such risk is paramount when alternative valuation methods are employed because of the time lag in the underlying data collection process." However, according to Jim Kirchmeyer, President of Kirchmeyer & Associates, a national real estate appraisal company, "There may be sound reasons for preferring a traditional appraisal to a non-traditional appraisal alternative in various circumstances, yet the currency of data available to an appraisal alternative such as an AVM is certainly not one of them."
Public record information is the information source used by the vast majority of appraisers and appraisal alternatives as the primary means to report recent property sale transactions. The most current form of public record data delivery is generically referred to as online data which provides recorded information updated as of the time of the query. Because of its currency, online data is generally more expensive than alternative data delivery methods that are not as timely. The other data delivery alternative is known as CD-ROM. In this case, the user receives a new CD on a monthly basis containing the most recent sales for the most current month available. This data tends to be considerably less expensive than online data services, Appraisers, AVMs and other appraisal alternative products all have access to both vehicles of data access. In addition to these public data sources, many AVMs also use MLS data or other non-public sources and deploy sophisticated forecasting algorithms or predictive analytics to further fine-tune estimates of value.
"AVMs and non-traditional appraisal alternatives access the same data sources as appraisers and there is no intrinsic advantage or disadvantage of one versus the other in terms of data currency," according to Rob Walker, EVP of Collateral Solutions at First American RES.
Access to current data sources presents challenges in the testing and evaluation of all collateral valuation products. Terry Kelsh, President of Kelsh & Associates, routinely tests AVMs and appraisal alternatives for a number of lending institutions and other clients. "We encourage our clients to test AVMs with sales that have yet to be reflected in public records. However, due to the continual and timelier updating of data sources with new sales data in these products, we tend to require our AVM test brands deliver results within a 48-72-hour window."
Overvaluation Risks in Declining Markets
Automated valuations and other valuation technologies coexist with traditional appraisal products under the broad umbrella of collateral assessment. These varying classes of valuation alternatives each have their own strengths and weaknesses which warrant or prohibit their use under different circumstances. However, with limited analysis Fitch has categorically fixed any valuation alternative other than a full appraisal into one group based on an arbitrarily perceived risk of overvaluation. Any risk of overvaluation must be considered across all valuation alternatives. For example, contrary to Fitch's assertions, many AVMs perform very well in changing markets due in part to their access to current and vast amounts of data, their ability to quickly and accurately analyze this data, and their objectivity relative to extrinsic pressures.
According to Dr. Michael Sklarz, Chief Valuation Officer of Fidelity National Financial, "As we all know, AVMs tend to be more conservative in their value estimates relative to appraisals. Further, good AVMs will automatically time-adjust the sales comparables which are used in the valuations. These adjustments will reflect both rising and declining price trends in the surrounding market." Ironically, these adjustments are often made using the same types of indexes that Fitch seems comfortable relying upon to identify "weak" markets. These adjustments are made objectively within each AVM, and consistently across all valuations in a given market by a given AVM. In contrast, due to the inherent nature of the business model under which appraisers are forced to operate, in many circumstances these traditional valuations can be subject to overvaluation influence.
A recent (February '04) research report published by the October Research Corporation strongly suggests that appraisers are under substantial "transactional pressures" to over state the value of a given property. "The survey reports percentages by which the pressured appraisers inflated the values and the results are alarming. Fifty-one percent (51%) of the time appraisers were asked to inflate value by up to 10%. Another 41% of the time appraisers were asked to inflate by 11% to 20% of the value. Eight percent (8%) of the time they were pushed for valuations exceeding 20% of true value. The report shows that one-third of appraisers say they fear losing business if they do not comply with these requests." The big issue is how much of the time do appraisers succumb to these transactional pressures to artificially inflate property values? The study concludes, "Everybody does it some of the time." These transactional pressures are likely to increase as real estate markets soften and mortgage transaction volumes decline creating less overall demand for collateral valuation products. References to various historical declines in real estate, when alternative valuation products such as AVMs were not widely available, further illustrate these market realities.
Conclusion
The ability to consistently follow current market trends and other identifiable risks must be properly evaluated across all collateral valuation options. When considering whether markets are strong or weak, it is essential to understand the advantages and limitations of all valuation tools. With this kind of understanding, which can only be fueled by valuation testing and analysis, a comprehensive opinion can be reached on which valuation tools work best under a variety of situations. Consequently, a sweeping policy initiative based on a less than a full evaluation of these and all valuation alternatives is surely not advantageous to Fitch or to Fitch's customers for the reasons noted above. The CATC has invited Fitch to clarify its position and looks forward to working closely with Fitch or any other organization that wishes to learn more about AVMs and other alternative valuation methods.
About the Collateral Assessment & Technologies Committee
The CATC of REIPA was formed for the primary purpose of increasing the awareness and education of collateral assessment technologies and their derivatives. The CATC was founded by Basis100, Fidelity National Financial, First American RES, Fiserv CSW, Real Info, Inc., TransUnion Settlement Solutions, and Veros Software in March of 2004. Sustaining Members include representatives from the founding members as well as AVMax, Countrywide and Dataquick. CATC objectives include the exchange of information regarding the application of AVMs and related collateral valuation tools, standardization and best practices in the use and evaluation of collateral assessment technologies, providing education and other information resources to our members and others, and the proactive collaboration with leading industry trade groups and other parties interested in collateral assessment.
About the Real Estate Information Professionals Association
REIPA provides an industry forum for the creative exchange of ideas and discussion of issues pertinent to our business climate. Professional development, legislative tracking/governmental relations, the development of industry standards, and keeping abreast with technological advances are benefits of REIPA membership. REIPA, the professional association representing the interests of those involved in REI commerce, is the nucleus for developing educational services and disseminating critical timely information to its' members nationwide. For more information, please visit www.reipa.org.
Contact:
Darius Bozorgi, Chairman
Collateral Assessment & Technologies Committee of REIPA |
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