As government regulations increase from Dodd-Frank, ECOA, Inter-agency Guidelines, and GSE Reform from Fannie and Freddie Mac, more and more scrutiny is placed on the lender to provide a credible value on their collateral. Knowing which product can be challenging for most compliance officers. Lets look at the several categories of real estate valuations that require a different scope of work depending on the level information required for underwriting. Among them; AVM (Automated Valuation Methodologies), BPO (Broker Price Opinions), Reconciliations, Evaluations, and Appraisals. Lets look into each category to see how each is used in determining a value.
Automated Valuation Methodology's
An AVM is born from big data, a real estate database with some assumed salient features from public records. This could include the living square feet, bedroom/bath, and age. Neighborhood boundaries are sometimes drawn, or the AVM will use a standard distance from the subject property, ie 1 mile, to find recent sales, run an algorithm, and almost instantaneously, deliver a value. There are consumer sites such as Trulia, Zillow, HouseValues, RealEstate.com, eppraisal.com ... and there are industry AVMs such as ValuePoint4, PASS, PowerBASE6, GeoAVM, PASSProspector, RealAVM, HomeValueExplorer, OnSite, GEOCore, IntelliReal, PropertyDataValuation, Veros, among the many. Each of these products has a slightly different scope of work, with different algorithms, providing a slightly different value. In many cases, there is no verification of condition, location, and or view, let alone the neighborhood boundaries. From my experience, much of the data is taken from public records, which is often inaccurate. AVMs are typically used for portfolio valuations and for collateral on low loan to value ratios and high credit scores. Its strength is its speed, its weakness is its credible results, especially for older or custom homes.
Broker Price Opinions
Lets look at BPOs as a valuation report. Brokers price opinions are typically completed by a salesperson on a specific provider form. It provides several enhancements over the AVM whereas, the salesperson is an expert in the area, knowledgeable about real estate and construction, and can best choose comparables. Second, the salesperson visually inspects the home and provides photos for the report. The benefit of a BPO is its knowledgeable practitioner, and verification of the collateral condition. The disadvantage is a poor report form and lack of regulatory oversight and guidelines. Typical uses for BPOs are for REO reporting and portfolio valuations.
While AVMS are fast, they can be inaccurate. Some valuation providers offer a product called reconciliations. These are typically either AVMs or BPOs that are reviewed by a licensed appraiser for accuracy and compliance. A fast and affordable alternative with an increased level of credibility.
Up to now, we have looked at valuations not covered by USPAP (Uniform Standards of Professional Appraisal Practice). These valuations cannot be called Appraisals and many lenders are being scrutinzed for using them in a loan application. Lets now look at the newest entrant into the field, the Evaluation or sometimes referred to as the gap appraisal. (The gap between a valuation and a traditional appraisal) Latest technology in big data and computerized algorithms, has led to some interesting valuation reports that are produced by licensed appraisers or a hybrid with an appraisal analysis and a salesperson inspection. The reports complies with the appraisal industry regulations USPAP. Reports are generated at the speed of an AVM, inspected by a knowledgeable participant in the industry, and adjusted and verified by a licensed local appraiser at the fraction of the cost of a traditional appraisal. Several companies have jumped into this arena with several variations of scope of work and form reporting. AXIS, ZAIO, Bradford, Axios, LSI, Valuation Link, to name a few. With database technology and regression analysis, this is something to be on the watch for in the near future. Typical uses for evaluations can include portfolio valuations, REO, loans less than 250k, HELOC loans, FSBO sales, legal, accounting, IRS, fraud prevention, review, investment, and more.
Traditional appraisals are always what you expect when you apply for a loan. Scope of work typically asks for a full interior inspection and reported on a Fannie Mae form. With the advent of regulations from (HVCC) Home Valuation Code of Conduct, CFPB, OCC, Dodd-Frank, Interagency Guidelines, ECOA, Licensed appraisers are increasingly required to analyze more data, increase their liability, and face blacklisting from lenders, and now possibly Fannie Mae. Fannie Mae has required all appraisals to be coded into UAD (Uniform Appraisal Data-set) and uploaded into their database called UCDP (Uniform Collateral Data Portal) In Jan 2015, Fannie Mae will be using this data to score the appraisal quality (AQM) and check for fraud. Appraisals that fall under this scope of work are typically origination loans that are designed to be sold to the GSEs such as Fannie Mae, Freddie Mac for liquidity. Non-lender work is limited to a few forms other than GSE or proprietary banks forms. Traditional appraisals have there place in the market place for loan origination and litigation work and depending on the scope of work, evaluations are ideal for everything else.
When ordering your next valuation product, look at all of your choices. I am a big proponent of evaluation reports, especially with verified salient features by industry experts that can be replicated over and over. In so many other industries we use big data to determine value, Kelly's blue book, Edmunds, life insurance actuary tables. More proof is that Fannie Mae has decided to get involved in data collection and big data. When choosing your next valuation, use updated technology, big data analysis, computer aided analysis, with a local appraisers touch.