Interest in Automated Valuation Models for Properties in Default Set to Rise as Experts Predict Increased Foreclosures in 2007

Mortgage industry experts are forecasting that defaults will increase in 2007 due, in part, to mortgage rate resets that result in higher monthly payments for borrowers.
 
Experts further predict that this trend will be especially visible in the non-prime and Alt-A segments, where many of the loans written in 2004 were adjustable-rate mortgages offering very low teaser rates or interest-only loans.  Both of these loan types have the potential for significant payment reset shock when the initial interest rates expire. 

Servicers Focus on Loss Mitigation Strategies

With the prospect of this development, mortgage servicers are focusing on updating their collections and loss mitigation strategies to prepare for the additional numbers of delinquent loans likely to be on their books.

When a home loan becomes 60 to 90 days delinquent it is considered to be in the early-stage loss mitigation phase of the delinquency-default cycle. It is during this time that a lender will typically obtain a preliminary indication of the property's current value.  This preliminary valuation helps to determine the servicer's loss mitigation strategy in the event that the borrower continues to miss payments. During this period, servicers must evaluate and decide on their loss mitigation options on a loan-by-loan basis. These options are typically classified by servicers as either forbearance or foreclosure.

Foreclosure is among the largest sources of loss for the industry, so most lenders prefer to work with the borrower to understand the cause of the missed payments and assist them by making payment arrangements that will allow the borrower to stay in the home. When payment arrangements can not be made, the lender's fiduciary responsibility is to take possession of the property and foreclosure sale is the likely next step.

Property Valuations Based on Broker Price Opinions

During early stage loss mitigation, valuation is most often determined by ordering a broker price opinion (BPO).  BPOs typically cost over $100 per report and are often received by servicers several days after an order is placed. Because approximately 50 percent of all loans cure within the 60- to 90-day delinquency timeframe, many of the BPOs ordered turn out to be unnecessary. While BPOs
have a key place in the loss mitigation process; they are not the most efficient method of valuing a property during early-stage loss mitigation.

Despite the benefits of cost efficiency and speed, automated valuation model (AVM) use for loss mitigation has been limited. The primary reason servicers have not deployed AVMs as widely as originators, is due to the belief that AVMs are best used for properties in "average" condition for the neighborhood. No matter what stage of delinquency or default a loan is in, many servicers feel that assuming the property is in average condition will lead to erroneous valuation conclusions. Their view is that borrowers experiencing payment difficulties are more likely to postpone or even eliminate necessary maintenance of the property, thereby lowering the property's value.

Step Forward Default AVMs

The valuation technology industry has recently introduced a class of Default AVMs that are designed specifically for early-stage loss mitigation and provide statistically accurate value estimates for properties in default.   

Default  AVMs provide servicing managers and loss mitigation specialists with a simple and cost-effective alternative to BPOs that allow them to forecast a realistic property value and determine the current loan-to-value ratio, both of which are key factors in deciding whether or not to foreclose on a property.

In conclusion, loss mitigation managers will find it beneficial to allocate resources in the most efficient way possible to achieve greater loss recovery. By starting the valuation process with an AVM designed specifically for default, managers will reduce the number of unnecessary BPOs ordered, enabling them to spend their funds on more seriously delinquent loans and saving on overall loan servicing costs.

For further information on default AVMs, please contact Robert L. Walker, CMB, CMT and executive vice president, collateral solutions, for First American Real Estate Solutions, at 714-250-6684; or by email at robwalker@firstam.com.  

First American Real Estate Solutions is a member of The First American Family of Companies and America's largest provider of advanced property and ownership information, analytics and services. First American RES' database covers nearly 2,900 counties representing 98 percent of the United States population. With more than 600,000 users nationwide, First American RES products are used by companies to improve customer acquisition and retention, detect and prevent fraud, improve mortgage transaction cycle time and cost efficiency, measure the value of residential and commercial properties, identify real estate trends and neighborhood characteristics, track market performance and increase market share. First American RES is a joint-venture company 80-percent-owned by The First American Corporation and 20-percent-owned by Experian.  More information about First American RES can be found on the Internet at www.firstamres.com.