With a recent surge in the use of automated valuation models (AVM) for collateral analysis of RMBS pools, Standard and Poor's has further evaluated these automated systems.
Fueled by benefits associated with streamlining the origination process such as reducing costs, the increase in AVMs is reflected in the fact that 10% of all new 2002 originations in residential mortgages are bound to have an automated valuation component attached to them in some way, according to a recent report by the rating agency.
Further, their usage has evolved from merely being a quality control tool to being part of the origination process.
According to the rating agency, the uses of AVMs range from "their employment as unbiased reality checks' on appraisals to their use as the sole determinant of property value."
These observations were made when the rating agency compared the results of a similar study S&P did in 1998 to the more current one.
"As the models expand their coverage and as they become more accurate, their use is going to increase. We have seen the models improve in these areas since our 1998 study," said Susan Barnes, an analyst at S&P.
Some models, for instance, may currently not cover certain regions but may eventually expand their coverage.
S&P also noted that with the onslaught of these AVMs, many variations on existing model types have emerged. Analysts said that these variations would have implications for the user in terms of accuracy, geographic coverage, and hit rate, which was defined as a measure expressed as a percentage of the total number of values the system was able to provide.
"In evaluating the performance of an AVM, people need to look at multiple variables in tandem," said Barnes. "You can't just splice the information and say this system is okay by looking at strictly variance. One has to look at all the characteristics together because the results can vary dramatically."
Why the review?
Though these AVM models have been around in the residential mortgage market for a while, they were used mainly to verify the value of the property derived from the full appraisal which was done at origination. However, as lenders have tried to streamline the origination process and cut costs, they began to focus on the collateral analysis part of loan origination because this takes a lot of time - a full appraisal could take 10 to 15 days before the value of a property could be determined.
Aside from this, the costs to the borrower can range anywhere from $350 to $450 on average. But with the use AVMs, property values can be determined almost instantaneously, and the costs to the borrower are limited to about $35 on average.
Though S&P still requires a full residential appraisal report to determine the property value on all first lien loans - the property value derived from these appraisals are used to determine the loan-to-value (LTV) ratio of each mortgage--but because AVMs have become more widely used in the various stages of these appraisals, then a full residential appraisal report may, in some cases, not be available.
"A full residential appraisal report is required on all first lien loans and that value is what is used to determine loan-to-value ratios," said Barnes. "But if we are not going to get that in the first lien loan, we need to be confident in the value that is coming from these AVMs and that is what necessitated our review of these models."
Models reviewed
The rating agency grouped the models reviewed into three types: Hedonic (uses a sales comparison approach and looks at physical property characteristics), Home Price Index (HPI) or Sales Index (makes current the last-known sale price by using price trend information and unlike the Hedonic model, these systems do not look at physical property characteristics); and Hybrid (makes use of the combination of the two former approaches).
Back in 1998, when the previous study was conducted, the hybrid model type did not really exist. It would seem that vendors have tried to develop the best of both model types and incorporated them into the Hybrid model.
S&P evaluated seven AVM systems in the most recent report to include in its rating criteria. The list includes CAPES (Countrywide); HPA 2000 (MRAC); HV Gold and HVExplorer (Freddie Mac); LSIndicator (Lenders Service); PASS (Basis 100); and ValuePoint Plus (First American Real Estate).
