REQUIRED READING: How To Obtain Distressed-Property Valuations


As REO volumes continue to drastically increase, servicers' needs for distressed-property valuations that are accurate and can be rapidly obtained at a reasonable cost has consequently become more urgent, stressed the panelists at who spoke at the Mortgage Bankers Association's recent National Mortgage Servicing Conference & Expo in New Orleans.

However, evaluating the validity and potential biases of values – whether produced through the use of broker price opinions (BPOs), automated valuation models (AVMs) or appraisals – often requires a significant investment of time and effort in itself. These demands pose a particular problem in a climate of rising workloads and a continued emphasis on disposing of REO assets as swiftly as possible.

This challenge of performing ample review on valuations, as well as efficiently determining which values merit closer inspection in the first place, is emblematic of a broader struggle in many servicers' shops these days, said Susan H. Allen, director at GMAC Residential Funding.

‘We are really stuck between a rock and hard place,’ she remarked. ‘On one hand, we've got dramatically escalating volumes in servicing and in the REO space; on the other hand, there are a lot of cost constraints right now in the industry.’

Servicers can nevertheless benefit from using certain key strategies to help ensure accurate distressed-property valuations, beginning with carefully evaluating both current and prospective vendors who provide BPOs or other valuation services.

Allen recommended digging deeper than such basic vendor-performance benchmarks as cost and turnaround time to inquire about internal performance metrics and accuracy characteristics used by the vendor itself. Quality-control practices, incentives and any BPO exclusions should also be considered and might provide fodder for further questioning, such as whether a particular exclusion is vendor-specific or indicative of a larger trend.

But on the level of individual valuations, ‘One of the things that we struggle with as that measuring the precise accuracy of any single BPO is impossible,’ said Allen.

Therefore, instead of trying to pinpoint individually inaccurate valuations, servicers should consider comparing results en masse from different vendors against each other or against an outside control, such as service-level agreements.

One reasonable evaluation metric might be the percentage of BPOs that are more than 30% above or below the actual REO sales price if the sale occurred within four months. Examining deviations of BPOs from internal review values and looking at differences between pre-foreclosure BPOs and REO BPOs – while taking into account any actual property damage that occurred in the interim – can also provide valuable insight.

When questionable numbers do appear, the acceptability of vendors' explanations after the providers are confronted should always be taken into consideration as well, Allen added.

James Park, chief appraiser and senior vice president at Aurora Loan Services, noted the numerous ‘crosscurrents’ currently influencing both the housing market's general pricing and REO properties specifically to make the task of properly pricing any given property a formidable one, regardless of the mechanisms used.

‘There are a million possible reasons – all of which are valid – as to why a particular house should be valued at a discount or maybe, in certain cases, at a premium relative to neighborhood values,’ agreed Robert L. Walker, executive vice president at First American. In many cases, he added, statistics may be irrelevant.

Complex or unprecedented property cases that have emerged from the severely declining housing market, such as a brand-new home in foreclosure or a house in a market with acute street-by-street market-performance variations, thus create a need to develop new methods of analysis more appropriate to these unique situations.

For example, ‘On an origination appraisal, a definition of 'market value' is the most probable price the property should bring in a comparatively open market in conditions requisite for a fair sale if the price is not affected by undue stimulus,’ Park explained. ‘Does that sound like an REO situation? Probably not.’

Both inside and outside an REO setting, appraisals – as well AVMs and BPOs – each have their inherent drawbacks alongside their individual strengths, he continued. While capable of providing a detailed analysis, appraisals tend to be time-consuming and costly. AVMs, on the other hand, are unbiased, quick and inexpensive, but rapid market shifts and the absence of visual inspections can impair their accuracy.

Although less expensive than appraisals and likely to benefit from the use of an agent active in the local market, BPOs also may not be objective – as some organizations use the same organization to both list the property and provide the valuation, Park noted.

Because of these and other BPO limitations, ‘We make no financial decisions based solely on BPOs,’ stated Janice Ramocinski, executive vice president and chief operating officer at Kondaw Capital Corp.

Instead, the firm generally orders a BPO from a national provider and then uses Web-based tools to order raw data on comparable sales, foreclosed properties and quit claim deeded properties in the area. Detailed property transaction history, lists of local preforeclosures and the expertise of asset managers assigned to specific regions provide more information to frame the BPO figure, she added.

In the search for reliable property valuation data, REO properties may be seen as clouding the current market and hindering the assignment of accurate value assessments, especially as short sales may continue to distort prices and values in many locales.

However, ‘At some point, when there are enough REO properties on the market, you get to the point where that is that market,’ Park observed.

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