Moody’s Warns Appraisal Alternatives Create RMBS Risks

The increased use of alternatives to traditional residential property appraisals has the potential to dilute the credit quality of new residential mortgage-backed securities (RMBS) unless certain risks are mitigated, according to a new report from Moody’s Investors Service.

 

In its report, Moody’s warns that appraisal alternatives including hybrid appraisals, broker price opinions and automated valuation models take varying approaches to determining property values and, as a result, could present the potential for inconsistent results that could prove disruptive in the securitization process.

 

“In seeking to reduce operational costs, increase efficiencies and address the shrinking ranks of U.S. property appraisers, mortgage market participants are exploring the use of alternatives to traditional means of calculating property values and, in some cases, starting to use them more,” said Lima Ekram, a Moody’s Analyst. “Their use in tasks that affect the credit quality of RMBS securitization collateral could, however, lead to a weakening of new RMBS transactions.”

 

However, Moody’s noted that there are some cases where alternatives could potentially improve the credit quality of RMBS transactions, adding in its report that “decisions to deploy cheaper valuation options, for example, could help preempt a shift toward smaller sampling during quality control or due diligence.”

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