Why AVM's (Automated Appraisals) Don't Tell the Whole Story
By Jann Swanson @ Mortgage News Daily
January 25, 2018

The use of Automated Valuation Models (AVM) is expected to expand following the announced plans of the Fannie Mae and Freddie Mac to waive the requirement for a professional appraisal on qualified purchase loans where the loan-to-value (LTV) ratio is at or below 80 percent.

Key Takeaways

  • Automated appraisals tend to skew much lower in price
  • AVMs depend on surrounding market data to determine a home’s price
  • AVM technology needs a lot of improvement to replace traditional appraisers

The Appraisal Institute has raised safety and soundness concerns over eliminating the appraisal requirement and is seeking a legislative rollback and federal banking regulations for real estate transactions generally treat automated appraisal methods as a due diligence tool rather than as the primary valuation.

CoreLogic’s Principal Economists Yanling Mayer says, from the perspective of economics, a clash between proponents of the two methods seems inevitable, “as advanced analytics and big data technology have expanded collateral evaluation capabilities. These alternatives today are often powered by large databases that can capture information on a given property as well as transaction records in and around the property in consideration.

Traditional appraisals rarely come in below the contracted price, she puts the incidence at about 10 percent of loan applications and a Fannie Mae study put it at less than 4 percent of funded loans. Consequently, LTV is typically unaffected by the appraisal.

Quite the opposite is the case with AVMs. CoreLogic analyzed a 190,000-unit sample of single family homes financed between July 2016 and June 2017 with a traditional appraisal but for which a CoreLogic AVM value was also available. The date of the AVM was not identical to that of the appraisal, but did not vary by more than 3.5 months.

Mayer says that while the debate will probably go on about the relative accuracy of the two valuation methods as well as their usefulness in predicting default risk and loan performance, everyone has to agree that reliable information is needed about collateral risk in both loans and portfolios in order to make informed underwriting and investment decisions.

View the original article at Mortgage News Daily