New Default AVM Offers Low-Cost Relief for Servicers

As mortgage defaults and foreclosures rise, 60- to 90-day delinquencies are predictably increasing at an even higher rate. Loan servicers facing potential defaults in an unstable market are feeling increasing pressure to decide between forbearance and foreclosure and to act quickly. Many times, they answer this question by ordering a broker price opinion (BPO). But since at least 50 percent of early-stage delinquencies cure, lenders often accrue unnecessary BPO expenses that cut directly into profits.

Until recently, there has been no fast, affordable and reliable method for determining a distressed property’s value on the real estate owned (REO) market. Traditional automated valuation models (AVMs) assume properties are in average condition, leading them to overvalue distressed properties, often considerably. BPOs are more expensive, time consuming and can be equally problematic, in part because they are generated by real estate sales professionals who may possess a natural bias toward higher values. Though more accurate, property appraisals simply take too long and cost too much.

First American CoreLogic is now offering a better tool for proactive servicers who want to get a good sense of loan-to-value (LTV) ratios within the 90-day delinquency window. The company’s ValuePoint®4 Default is a new AVM designed specifically for servicers. “Loan servicers are in a tough place,” says First American CoreLogic’s Robert Walker, executive vice president of collateral solutions, “home prices have fallen, while delinquencies and defaults are rising dramatically. Those converging forces are causing valuation expenditures to grow exponentially.”

ValuePoint 4 Default is designed as a fast, inexpensive valuation approach that delivers credible accuracy. This specialized AVM recognizes that AVMs designed for the origination segment are prone to overvalue distressed properties and uses advanced algorithms to adjust for conditions typical to delinquency.

• The home may not be in average condition for its neighborhood.
• The property improvements may not actually exist.
• There may be recent external circumstances that dramatically impact the property’s value.

While no AVM can identify a unique fact that can drastically reduce a particular home’s value, ValuePoint 4 Default applies refined methodologies, including a patented analytic process, to historical, public and proprietary data to deliver values with unprecedented accuracy.

According to First American CoreLogic Chief Economist Mark Fleming, PhD, “ValuePoint 4 Default is a hybrid model that combines index, assessment, and neural-net methodologies with a proprietary reconciliation procedure that takes into account property-specific and micro-market factors influencing the delinquent property’s current market value.”

When tested against a standard AVM on a nationwide sample of more than 20,000 REO sales, ValuePoint 4 Default delivered convincing results:

• The standard AVM returned a value that was on average higher than the actual REO sale price by 32.4 percent. ValuePoint 4 Default slightly overestimated the REO sale price by just 3.6 percent.
• ValuePoint 4 Default came within 10 percent of the actual REO sales price 41.4 percent of the time, compared to 31.1 percent for the traditional AVM.
• ValuePoint 4 Default overall standard deviation (a measure that penalizes for large outliers) was 37 percent, compared to 65 percent for the traditional AVM, where the lower percentage shows greater control and lower outlier risk.

It is interesting to note that no accuracy testing is currently performed on BPOs, making it impossible at this time to test ValuePoint 4 Default’s accuracy against BPOs. “In addition to early delinquencies, ValuePoint 4 Default can provide a low-cost choice for second mortgage lenders who must frequently determine collection strategies on relatively small balance loans,” adds Walker. “And banks managing regulatory requirements on foreclosed assets will also find it fast, inexpensive, and good support for conservative write-downs.” For comments and further discussion please contact the author, Rob Walker at robwalker@firstam.com.

About First American CoreLogic
First American CoreLogic, a First American Company (NYSE: FAF), was formed through the merger of First American Real Estate Solutions, America’s largest provider of advanced property and ownership information, analytics and services, with CoreLogic Systems, the leading provider of residential mortgage risk management and fraud protection technology and services. The combined companies’ databases cover more than 2,900 counties, representing 99.1 percent of the United States population. With more than 600,000 users nationwide, First American CoreLogic products are used by businesses 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. More information can be found on the Internet at www.facorelogic.com.