The use of alternative methods to appraise home values is likely to expand as lenders and servicers attempt to cut costs, and this could pose new risks for residential mortgage bonds, according to Moody’s Investors Service.
In a report published Tuesday, the rating agency warned that some alternatives to traditional appraisals may be more reliable than others.
“In seeking to reduce operational costs, increase efficiencies and address the shrinking ranks of U.S. property appraisers, mortgage market participants are exploring the use of alternatives to traditional means of calculating property values and, in some cases, starting to use them more,” Moody’s analyst Lima Ekram said in the report. “Their use in tasks that affect the credit quality of RMBS securitization collateral could, however, lead to a weakening of new RMBS transactions.”
Alternative methods include hybrid appraisals, broker price opinions and automated valuation methods all have their strengths and weaknesses, according to Ekram. Hybrid appraisals, for example, rely on information from on-site property examinations conducted by a third party, often a real estate agent or broker.
Mitigants to such issues include the use of products with stronger profiles, adherence to borrower or loan attributes that result in stronger and/or more predictable mortgage performance, and additional RMBS credit enhancement. A further factor is whether a nontraditional alternative is used as the primary means of property valuation, or whether it is employed mainly as a means of quality control.
On the other hand, in some situations the greater use of alternatives has the potential to improve the credit quality of RMBS transactions, Moody’s says. That’s because decisions to deploy cheaper valuation options could help preempt a shift toward smaller sampling during quality control or due diligence.