Assessing Broker Price Opinion Accurary: Can a Tailored Default AVM Perform at Parity?

Introduction

The stock of homes in foreclosure has been rising for the past two years, a trend expected to continue through 2008. In addition to those going into foreclosure, millions more borrowers will experience some serious stage of delinquency or default due to job loss, divorce, major medical event, or mortgage payment reset stress. Whether a servicer pursues a foreclosure or forbearance collection strategy depends heavily on the current value of the property and the anticipated loss severity.

For almost 20 years, lenders have employed broker price opinions (BPOs) to assess delinquent or foreclosed property values. BPOs originated during the late 1980s in the nation’s oil patch region, when high interest rates and a slow real estate market resulted in lenders and mortgage insurance companies holding large REO property inventories. The BPO structure was born from the need for periodic valuations to comply with regulations, coupled with the availability of under-employed real estate agents willing to provide value opinions for much lower fees than appraisers. Today BPOs are used throughout the industry to assess value without the cost of a full appraisal. At loan servicing conferences or tradeshows, BPO vendors are common and real estate agents remain eager to learn how they can earn money by providing these services.

Lenders, servicers, and investors must determine when BPOs are the appropriate valuation method and which BPO providers to use. Selection criteria can include turnaround time, customer service, and price, but these criteria do not necessarily indicate valuation accuracy. In fact, there is little documented research indicating the accuracy of BPO valuations. A more important selection criterion should be consideration of technique accuracy relative to the risk of delinquency and loss severity risk, as well as the extent of due diligence performed and reasonable pricing.

The automated valuation model (AVM) can potentially meet the accuracy, due-diligence, and price criteria. Less costly than BPOs or appraisals, AVMs are routinely tested for accuracy and assessed for value reliability. Therefore, comparing BPO accuracy against AVMs can provide valuable insight. However, traditional AVMS typically over-predict REO values significantly and are therefore not appropriate. ValuePoint 4 Default™ (VP4 Default™) is an AVM that has been explicitly designed and calibrated to predict a “distressed value” for the property as opposed to a market value.

In this paper we study BPOs’ accuracy in the specific application of assessing REO sale value, a common and currently increasing demand. We then compare BPO accuracy to that of VP4 Default on the same sample of REO sales. The results of this accuracy test show that VP4 Default can perform at similar accuracy levels of BPOs tasked with REO value assignment.