As more lenders utilize automated collateral valuation systems for appraising residential mortgage properties - there have been a number of Heloc transactions that have included automated collateral assessments - Standard & Poors Ratings Service recently affirmed its criteria for validating the use of any such system in pools rated by them.
These automated systems determine property value electronically, as opposed to appraisers ascertaining the property value on site.
"The testing is done because there have been a number of lenders who want to use the automated collateral system in place of the traditional appraisal form for efficiencies and cost savings," said Susan Barnes, director at S & P residential mortgage group. She added that the rating agency needs to get comfortable with the use of the automated system on loan pools.
"It's important because our loss coverage numbers are affected," Barnes stated. "We have to make sure that our appraisal is within an acceptable variance as well as the automated appraisal."
Also embedded in the rating agency's loss coverage model is the Documentation and Automated Collateral Scoring System (DACSS). "This system will tell an originator or an issuer under what property, borrower and loan characteristics are eligible for the various loan documentation and collateral-type exemptions," she explained.
For instance, in the past, when future borrowers would do a limited income documentation (which is when potential borrowers would supply less documentation than what is typically required for proof of their income) S&P would increase its foreclosure-frequency assumption or default-frequency assumption. But with DACSS, if the loan is eligible for a documentation exemption, this increase is not assessed on that loan.
"On the collateral side, we look at the characteristics of the loan and determine if it is eligible for a different appraisal form or even to go on automated assessment," she said.
And DACSS is gaining ground. "The DACSS system is actually in the final stage of a data pilot," said Barnes. "When that's done, it would be rolled out and we would expect more people to utilize these exceptions on a more frequent basis."