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Mortgage technology and beyond: A closer look at Icalc

Feb 01, 2005

AVMs have their place in the mortgage industryCharlie Elliott, MAI, SRAAutomated valuation models, real estate appraisals Throughout the mortgage industry, there has been a great deal of discussion about AVMs lately. Some people love 'em, others hate 'em. There are valid reasons for both. But the fact of the matter is that AVMs can be a useful tool when used in the right situation. Just to make sure we're all on the same page, let me make it crystal clear what we're talking about. AVM is short for Automated Valuation Model. An AVM is a computer-generated evaluation that has been developed from general real estate data which has been collected from multiple listing services, county property tax departments, local register of deeds offices and other similar databases. Statistical models of varying levels of sophistication are applied to this data. Many, and perhaps most, AVMs use some sort of multiple-regression analysis as the basis for their value calculation. This could perhaps best be compared to a scatter diagram, where price is on the horizontal axis and the square footage of living area is on the vertical axis. A value per square foot is then selected in the approximate area where the preponderance of dots is centered. The results of these evaluations vary from being very reliable to being worthless and misleading. Their effectiveness depends on the availability of relevant data and the use of appropriate statistical models. When the AVM was introduced not too many years ago, some people thought that it was the beginning of the end of the real estate appraisal industry as we know it. After all, they were much cheaper and, perhaps of even more importance, there was quite a bit less turnaround time involved with an AVM compared to that of an appraisal. Most knowledgeable people now realize that the real estate appraisal industry cannot be replaced by AVMs. After all, without human inspection of the property and with little, if any, verification of the data, an AVM tends to be less accurate than an appraisal. Despite their shortcomings, however, AVMs aren't going away either. One way to look at this is when you're sitting at your desk, sometimes you feel it is necessary to use your fine stationery with the company logo on it and other times you find it more practical to use scratch paper. The same principle can, in effect, be applied to use of appraisals and AVMs. Sometimes loan officers use AVMs before they order more expensive and time-consuming appraisals. AVMs can also be used as a review tool to evaluate appraisals. Furthermore, AVMs can be used as a stand-alone product in certain situations. The best example is that of a low-risk loan where the value of the collateral is secondary. Of course, the underwriter and the company that is actually funding the low-risk loan must decide whether an AVM can be accepted in lieu of an appraisal. Fannie Mae and Freddie Mac actually accept AVMs on some of their loans, but not on loans where significant risk is involved. These organizations are relatively conservative as far as AVM usage goes and the risk factor must be extremely low. These government-sponsored enterprises (GSEs) would be more likely to accept an AVM where the loan-to-value ratio is very low, maybe 50 percent or less. Even then, they would most likely be interested in substituting an AVM if the borrower has excellent credit. Underwriters, originators and mortgage brokers commonly use AVMs as a screening tool. Let's say a broker has 20 leads per month and spends $20 on each of them. Using that $400, the broker can eliminate perhaps half of those leads that aren't worth his time, and they can focus on the 10 quality leads, making more effective use of their time. Since AVMs first appeared on the marketplace, this facet of the industry has evolved. Today, there is more data available than there was in the past, a boost to the accuracy of these evaluation tools. Furthermore, a lender has more AVMs to select from than the limited amount available when this type of real estate valuation was introduced to the market. Even though many people in our industry pooh-poohed this evaluation concept in the beginning, most major appraisal companies offer some type of AVM these days. In fact, some companies that offer AVMs now offer a number of them. Some offer cascading AVMs. Cascading AVM platforms offer customers a variety of AVMs rather than just one, which has historically been the case with most AVM vendors. Given that each AVM is unique and may or may not prove to be available in some geographic areas, the availability of the multiple AVMs is attractive to customers having business over a broad geographic area. The term cascading is used to describe the way the process works. One AVM at the top of a list of available AVMs is first considered by the platform. If no results are achieved, the platform then proceeds to the next available AVM and continues down the list until one is found that is capable of evaluating a given property. This type of system is becoming a favorite among customers and vendors alike since it is a more efficient way of delivering evaluations to the customers. This does not guarantee that a suitable sum will be found, but it greatly improves a customer's chances for this to happen. Despite their shortcomings, AVMs offer many benefits. It's just a matter of determining the need and purpose for the valuation to decide whether or not to use an AVM instead of a full service appraisal. Charlie W. Elliott JR., MAI, SRA, is president of ELLIOTT & Company Appraisers, a national real estate company. He can be reached at (800) 854-5889, e-mail [email protected] or visit
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Feb 01, 2005
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