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Making AVMs Even More Reliable

Mercury Network’s OptiVal Automated Valuation Model (AVM) Cascade has expanded to include HouseCanary’s AVM. The addition of HouseCanary brings yet another AVM to the Cascade to assist lenders in reducing risk and maximizing profit.

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The OptiVal Cascade now contains twelve AVMs, and is the only independent and objective Cascade that evaluates multiple AVMs to select the most accurate for a particular piece of real estate. OptiVal is updated every 90 days with the highest quality data representing the most recent sales – months ahead of county recordings and other data offerings.

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Mercury Network’s technology is used by nearly 1,000 of the nation’s lenders and appraisal management companies (AMCs) to manage real estate valuation operations and collateral risk. “We’re proud to be selected for the OptiVal Cascade,” said Chris Stroud, Chief of Research at HouseCanary. “Lenders need easy access to highly accurate data to mitigate risk and HouseCanary’s AVM has an excellent history of pinpointing property values. Objective testing will make our AVM more accessible to lenders when they need it most.”

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“The OptiVal Cascade is an independent test of multiple AVMs against the freshest test data available on the market today,” said Craig Zielazny, VP of Data and Analytics at Mercury Network. “Our objective is to include all the AVMs that lenders are interested in using, and providing them with the specific performance for a particular AVM in the subject property’s area. We’re pleased to welcome HouseCanary to the OptiVal Cascade.”

Founded in 2014, HouseCanary’s mission is to help people make better real estate decisions. Built on a foundation of great data, powerful models, and predictive analytics, the HouseCanary platform aggregates millions of data elements, including more than four decades of property data and a rapidly expanding arsenal of proprietary calculations and analytics, to accurately define and forecast values and market influences.HouseCanary is financed by notable investors including Hillspire (Alphabet Executive Chairman Eric Schmidt’s family office), PSP Growth/PSP Capital (firm founded by entrepreneur and former Commerce Secretary Penny Pritzker), Alpha Edison, ECA Ventures, Raven Ventures and others top Silicon Valley investors. The company is headquartered in San Francisco.

About The Author

Tony Garritano
Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at tony@progressinlending.com.

Eliminate Risk: Three Tips For Developing Strong Risk Management Infrastructures

Improperly handling risk management efforts can make or break your loan origination process. Often, unforeseen issues arise that can be effectively dealt with, or even prevented by, the implementation of a strong risk management infrastructure.

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With potential crises just waiting to be revealed, it is beneficial for lenders to identify these risks up front, before the damage becomes irreparable. Three areas on which lenders should focus in order to protect themselves and their borrowers are title search insurance, AVM audits and the use of innovative technology for property reports.

Title Search Insurance

Performing a title search consists of locating all necessary documents to determine and verify the legal owner of a property, and additional interest(s), claims and encumbrances on the property. Having insurance on these searches protects the lender by insuring that the information presented in the search is accurate and valid. If a title search is performed without proper insurance, the lender is left responsible for any issues down the road. For example, if a lender closes a home equity loan, and two years later the borrower defaults and the lender was not aware that there was a mortgage lien filed prior to the home equity that lender is subject to any losses that could occur as a result of the error on the original property report.

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With title search insurance, any errors or missing data on the property report are covered, and the lender is guaranteed a lien position. This indemnifies the lender of fault and losses for any incorrect data on the initial report, should the borrower default on the loan. Lenders should always partner with providers that not only handle nationwide title searches for them, but also provide sufficient title search insurance.

AVM Audits

Automated Valuation Models (AVMs) allow lenders to receive information regarding a residential property at the touch of a button. They show the lender the market value for the property, the tax assessor’s indication of value, recent sales history and comparable sales analysis of similar properties. And, although some lenders lost confidence in AVMs as a result of the 2008 financial crisis, they are making a strong comeback.

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In order to keep AVMs up to date and functioning properly, lenders must perform timely audits or validation. These audits should include a thorough comparison of a sample pool with AVMs versus a benchmark, such as a standard appraisal. This allows lenders to understand the strength and accuracy of the AVM model being used and the deviations between both, enabling the lender to adjust guidelines if necessary. Auditors want to see AVM validations to ensure the AVMs are delivering accurate values on properties.

By scheduling regular audits, lenders can trust that their AVMs are presenting correct information.

Using Innovative Technology for Property Reports

Many lenders still receive property reports from third parties that manually pull information from the Internet, transpose it to a report and then deliver the package to the lender. This physical transport of data from one document to another, or the “stare and compare” approach, significantly increases the risk of human error.

Lenders should engage with providers that use technology to create property reports directly from information provided by the courthouse or credit repositories. When no data is manually input by humans, the process becomes much faster and ensures accurate information. The lender is then delivered one concise report in a timely and compliant manner.

The best way to enhance your risk management infrastructure and keep up with competitors is to partner with an expert, third-party provider that offers full title search services, including insurance, AVM audit services and technical property reports. This will not only set you apart from others maintaining out-of-date processes, but will also ensure that all parties are protected throughout the entire loan origination process.

About The Author

Tim Smith
Tim Smith is co-founder and president of Austin, Texas-based FirstClose, provider of end-to-end technology solutions to refinance and home equity lenders nationwide, as well as a vendor management system that eliminates duplicate data entry. The company’s flagship product, the FirstClose Report, is the first, comprehensive refinance and home equity loan solution with capabilities to deliver title, flood, valuation and other important data elements in one report. For more information, visit www.firstclose.com.

Partners Seek Valuation Accuracy

Veros, a provider of the automated valuation model (AVM) VeroVALUE and a reseller of other top-performing AVMs, has been integrated into San Jose, California-based CalyxSoftware’s Pointsoftware. Calyx Software is a provider of loan marketing, originating and processing software. Through the integration, Veros provides immediate access to VeroVALUE and other respected AVMs for Point users, along with formulated AVM cascades that use popular industry AVMs in succession to increase user hit rates.

VeroVALUE is a consistent high performer in industry tests, bringing perspective and accuracy to valuation efforts in support of lending decisions, portfolio analysis and risk reduction strategies. Veros also offers a variety of AVMs from other companies, all vetted to meet Veros’ high standards.

“In talking with VeroVALUE users, I was pleasantly surprised to learn the accuracy of their AVM when compared to other AVM vendors they tested,” said Dennis Boggs, executive vice president, business development for Calyx Software. “One user said, ‘We feel safer using VeroVALUE due to Veros’ conservative approach. The other vendors we tested didn’t apply any standard deviation and their results were all over the place – up to 30% off compared to the appraised values,’” Boggs related. “With the new VeroVALUE interface, users will now have improved ease in ordering from within Point, save time by not having to re-enter data, and have the value returned in a PDF file that is automatically saved in Point’s Document Storage,” he said, adding, “We love that.”

AVMs have long been a staple of the lending industry, providing fast, objective and inexpensive valuation information for a variety of uses. Evolved modeling techniques and a wealth of available data have combined to make AVMs much more accurate and reliable, increasing their importance in mortgage transactions in recent years.

“Partnering with Calyx to make highly accurate AVMs from Veros and others immediately available is a very positive development for Point users,” said David Rasmussen, senior vice president of operations for Veros. “Lenders, brokers and other Calyx users are able to make better and faster decisions to improve loan performance and reduce risk by using technologies from Calyx and Veros,” he said. “We are delighted to be part of their reliable network.”

About The Author

[author_bio]

Tony Garritano
Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at tony@progressinlending.com.

Partnership Provides Deeper Valuations

Global DMS, a provider of Web-based compliant valuation management software, and Collateral Analytics, a provider of real estate analytics and valuation products, have formed a strategic alliance that integrated various components of their software valuation solutions. From within Global DMS’ single-source eTrac Enterprise platform, which compliantly handles the entire appraisal management process, users can now access Collateral Analytics’ products and services that include its automated valuation model (AVM) services, data analytics products and risk management solutions.

“There are many factors that must be taken into account in order to determine accurate property valuations and reporting in today’s market,” states Vladimir Bien-Aime, president and CEO of Global DMS.  “This new partnership extends to our customer base Collateral Analytics’ sophisticated data analysis capabilities that produces precise reports on valuations, market analytics and risk scores.”

Collateral Analytics’ AVM service provides highly accurate property value estimates with supporting data for forecasting and decisioning; its data analytics products also report on historical and current home price trends as well as forecast future trends and market condition.  In addition, the company’s risk assessment tool, CA Risk Profiler, determines the probability of valuation risk for BPOs and appraisals based on the use of numerous data points.

“Global DMS has done a tremendous job in building a platform to bring automation and compliance to the entire valuation management process for organizations operating in the appraisal business,” said Michael Sklarz, president and CEO, Collateral Analytics.   “Our solutions complement one another well and make for a robust offering that can be seamlessly accessed by Global DMS customers. We are very pleased to have established such a strong partnership with Global DMS.”

Global DMS’ eTrac Enterprise platform empowers organizations to order, assign, track, review and deliver completed appraisals in full compliance to the Uniform Collateral Data Portal (UCDP) for sale to investors and GSEs.  Both Global DMS and Collateral Analytics’ solutions can apply customizable business rules for clients to manage their specific internal processes and procedures.

The combined solutions significantly reduce costs, drive appraisal review efficiency gains, and deliver greater accuracy, reliability and time savings.

Progress In Lending
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AVMs: What You Don’t Know Can Cost You

Download This Article As A PDF HERE

TME-PHuffIgnorance is not bliss —especially when it comes to business and the bottom line. Yet day in and day out, lenders are operating in the dark and losing dollars in the process. Last month, I wrote about the most common misconceptions about AVMs, also known as automated valuation models, the most commonly used collateral evaluation tools. AVM are being used over one billion times each month, and I estimate that hundreds of millions of those billions of AVMs are being used by lenders and servicers in the mortgage industry. But even considering these gargantuan proportions, most mortgage folks are surprisingly unaware of how big an impact AVMs can have on their bottom lines.

This month I’m going to cover three of the most common ways AVMs are being used today. And for those of you concerned with your bottom lines, I’ll get into the concrete details about how lenders and servicers are saving — or wasting — thousands of dollars or more each month, simply by the way they approach AVM suitability.

Accuracy Matters

One of the biggest misconceptions about AVMs is that they are inaccurate. Last month, we revealed the fact that standard error rates of AVMs are actually lower than those of traditional appraisals. While my aim is not to rank one form of evaluation above another, it is to point out that AVMs can be quite reliable and highly appropriate for lower risk activities and transactions. I’d also like to remind you that there is no benefit to using an unreliable tool, not where data and decisions are concerned. Accuracy matters.

This is a key point. When financial decisions are being made based on a reported dollar value, businesses need to ensure that the evaluation tools being used are producing the most accurate value possible. While this may seem like common sense, this is not the general practice being exercised in the mortgage industry when it comes to AVMs. Hundreds of millions of times each year, lenders and servicers are running AVMs without much thought as to the accuracy of the reported figures, and this haphazard approach is likely costing them more than they imagine.

The following are three of the most common ways that AVMs are being used by lenders and servicers today:

1) Mortgage Pre-qualifications

A lot of smart lenders are using AVMs in the pre-qualification process. As they’re taking a quick, cursory look at borrowers, they’re also taking a quick review of a property, to see if a deal is worth pursuing. AVMs are well-suited for this review. It takes just minutes to run an AVM, and if the right one is used, the results can be surprisingly accurate. However, if the AVM is not accurate, lenders are likely wasting money and missing valuable opportunities.

If an AVM comes in significantly below the property’s actual current value, lenders are missing opportunities in loans that can’t be made. Let’s say your average gross profit per loan is $4,000; even one lost customer a month can amount to nearly $50,000 in missed opportunities per year. If, however, the value comes in too high, lenders can invest valuable man-hours taking a loan through the process until an appraisal reveals that the transaction won’t go. Even at a pay rate of $25 per hour, a processor spending a mere four hours on a loan that will never fund is costing the company $100 on lost labor.

This situation might be understandable if an AVM returns a value of $200,000 and an appraisal comes in at $194,000, and it’s just enough to kill the deal. In cases like these, hopefully the loan officer informs the borrower that the value is tight and may not come in as needed. If, on the other hand, the appraised value comes in at $186,000, and there was clearly no reason to even run a full appraisal, chances are, you’re going to have a very upset borrower on your hands. Incidentally, in case you’re wondering, yes, there is a way to make sure that you have significantly fewer of those $200,000/$186,000 scenarios. That is absolutely within a lender’s control.  I’ll get to the details of how in a moment.

The Cost of Losing Trust

Back to the $200,000/$186,00 situation. There’s a more significant, long-term financial issue at hand here. Borrowers traditionally cover the cost of the appraisal, which is roughly $350 for the average non-FHA loan. From what I hear, borrowers don’t take very kindly to paying fees for a loan that has no possibility of being funded. While this is important for any lender to remember, credit unions, being the member-driven organizations that they are, might want to be particularly attuned to this.

There have been numerous studies of the costs of losing trust, and consequently losing a customer who feels he or she has been wronged.  Anecdotal evidence shows that a disgruntled customer will tell between eight and 16 people, with 10 percent telling more than 20. When you factor in the ease of communication and the viral nature of social media, the number increases exponentially. Even if they tell no one, 9 out of 10 unhappy customers will never purchase goods and services from you again. Not a good consequence when, according to Gartner Research, the cost of acquiring a customer is five times the rate of retaining existing ones.

2) Home Equity Lending

There are two ways that lenders use AVMs with home equity lending. The first is to value the property for a home equity loan or line of credit. The second is to evaluate the line after it has been issued to determine whether or not the property has enough value to support it. In other words, lenders often determine whether or not to increase, decrease or shut down a line of credit based on the borrower’s home equity.

Home equity lending requires that an evaluation must include a physical inspection of the subject property, but it does not require a full appraisal, so a lot of lenders opt to use AVMs in conjunction with a property inspection report. As with mortgage pre-qualifications, lenders can lose home equity business when they use AVMs that erroneously under-report the true value of a property. That can add up to losing literally thousands of dollars each year over the course of several years, since home equity lending brings a steady income stream for lenders. With variable rates that range from three or four percent to 11 or more percent, and a loan amount of $100,000, the lender stands to lose $2,000 to $10,000 or more each year, over the course of years, for every lost customer. Lose one customer a month and that number can jump up to $100,000 or more each year.

If the lender is using AVMs to evaluate its home equity portfolio, and that AVM erroneously over-values properties, that lender is at risk of losing the additional income generated by higher interest rates charged to borrowers for higher loan to value ratios. However, if an AVM erroneously under-values properties and the lender reduces or revokes a credit line, it could be losing out on the additional income from the increased line. What’s more, if a lender was negligent in selecting the AVM, and revoked a line without just cause — meaning it can’t prove how and why an AVM was deemed suitable — it puts itself at risk of not only noncompliance, but also litigation.

A Public Relations Nightmare

According to numerous news sources, including CBS, Bloomberg, ABC, and the Los Angeles Times, at least two of the country’s top lenders have been named in class action lawsuits for illegally freezing borrowers’ home equity lines, which according to some sources essentially violates part of the banks’ agreement for the bailout. Plaintiffs’ attorneys cite numerous experts who have stated that erroneous AVMs are at the root of the allegedly illegal actions.

While I am not here to deem an organization guilty or not guilty, I would like to point out the repercussions of this type of debacle. In addition to the hundreds of thousands of dollars in legal costs of defending a class action lawsuit, and the tens—if not hundreds—of millions of dollars a settlement could cost, there is the issue of the public relations nightmare that follows a disaster like this. While the big banks have legal teams and large PR firms to handle these types of issues, small shops, midsize lenders, community banks and credit unions do not. A class action lawsuit may or may not drag a lender into failure. At the very least, it can play a major role in the shortened lifespan and immediate profitability of an organization.

3) Portfolio Analysis 

Lenders and servicers are required by law to analyze their portfolios at least once per year. Most servicers conduct this analysis every six months, and most use AVMs for this type of analysis because they’re so cost- and time-efficient. However, there’s more to the story. Any business entity with a servicing portfolio is required by law to hold back anywhere from 20 to 50 – or in the case of home equity loans, 100 – percent of the value of their portfolios in liquid reserves. That figure is traditionally based on values derived from AVMs.

If a company values its portfolio too high, it is unnecessarily tying up valuable liquidity. To put a dollar figure on this, let’s say that the AVM you’re using returns values that are, on average, 15 percent higher than the properties’ actual value. For a portfolio valued at $50 million, you could be tying up an additional $7.5 million of funds that you are perfectly entitled to keep liquid. On the flip side of that coin, if the AVMs you’ve selected undervalue the properties in your portfolio, you are exposing yourself to the fees and fines associated with violating Basel III requirements. Portfolio analysis is a fine line with potentially severe financial consequences on either side. Your AVMs’ accuracy can tip the scale one way or the other, to the tune of anywhere from thousands to millions of dollars.

Accuracy Testing Pitfalls

As these dollar figures indicate, it’s critical to use the most suitable AVM if you want to reduce loss, maximize revenue and maintain existing customers. Most lenders and servicers do some type of accuracy testing, but chances are, they’re not using the most cost efficient means.

Some companies put AVM selection in the hands of the individual ordering the AVM. That’s not a good idea, because it’s virtually impossible for a human to be able to analyze AVMs well enough to rank each AVM sufficiently to build the most suitable cascade for a property. Others rely on their AVM providers to advise them in building their cascades, which is probably a slightly better solution, unless your AVM provider has an interest in one or more of the solutions it provides. Still others opt to use analysis companies that conduct in-depth research and accuracy testing for each of the AVMs that the lender or servicer uses. While this is certainly a better option than a staff member or AVM provider, it can be expensive and time consuming. These reports cost $50,000 to $60,000 a piece and are generally done quarterly, which brings the annual cost to $200,000 to $240,000 or more per year. And because they’re generally produced by actual humans, you can expect a wait time of roughly six weeks.

Your best choice is to use a technology designed specifically to be flexible in determining AVM suitability, like Platinum’s OptiVal, which can determine the most suitable AVM cascade in minutes. Whichever technology you choose, make sure to use a flexible technology, one that can factor in risk factors like loan to value, type of transaction, and borrower’s credit score. Each AVM is going to function differently for different properties.  There’s no such thing as a one size fits all AVM. The difference between using the most suitable AVM and the least could be vast, as can the difference between using the most and least suitable appraiser. An appraiser that specializes in Des Moines properties couldn’t produce an accurate value for a property in Brooklyn the way one who specializes in the area could.

Stop the Loss

It’s easy to underestimate the role that AVMs can play in a company’s profits and loss. With their low cost and speed, a lot of folks jump to the conclusion that AVMs couldn’t possibly have much impact on the bottom line. But they can and they do. It’s time to get out of the dark. AVMs are the mortgage industry’s most commonly used collateral valuation tools, bar none. But, used improperly, AVMs can do more harm than good. In fact, I believe AVMs are slowly, methodically draining profits for virtually every lender and servicer in our industry, to the tune of thousands of dollars each year. And that’s simply because lenders and servicers have a haphazard approach to AVM suitability and selection.

Accuracy certainly matters when using AVMs. In the mortgage industry, virtually every lending decision is hinged on collateral value. We can’t fool ourselves into thinking there are any cases where accuracy is not an issue, when in fact, inaccurate AVMs can lead to losses as subtle as missed opportunities or as dramatic as compliance violations, lawsuits and tied up liquidity.  Public relations disasters and reputational risk are harder to measure, but can end up being extremely expensive for lenders and servicers.

It’s time to stop the loss and start taking AVMs seriously. Unless of course, your organization has tens of thousands of dollars to waste each year.

About The Author

[author_bio]

Phil Huff is CEO at Platinum Data Solutions. Phil is a CEO with a history of growing companies whose technologies revolutionize manual mortgage processes. As co-founder and CEO of eLynx, Phil built the management team, grew recurring revenue to $15 million, and orchestrated the company’s sale to American Capital for $40 million in 2004, five years after the company’s launch.

AVMs: What You Don’t Know

Ignorance is not bliss —especially when it comes to business and the bottom line. Yet day in and day out, lenders are operating in the dark and losing dollars in the process. I wrote in the past about the most common misconceptions about AVMs, also known as automated valuation models, the most commonly used collateral evaluation tools. AVM are being used over one billion times each month, and I estimate that hundreds of millions of those billions of AVMs are being used by lenders and servicers in the mortgage industry. But even considering these gargantuan proportions, most mortgage folks are surprisingly unaware of how big an impact AVMs can have on their bottom lines.

Now, I’m going to cover three of the most common ways AVMs are being used today. And for those of you concerned with your bottom lines, I’ll get into the concrete details about how lenders and servicers are saving — or wasting — thousands of dollars or more each month, simply by the way they approach AVM suitability.

Accuracy Matters

One of the biggest misconceptions about AVMs is that they are inaccurate. We revealed the fact that standard error rates of AVMs are actually lower than those of traditional appraisals. While my aim is not to rank one form of evaluation above another, it is to point out that AVMs can be quite reliable and highly appropriate for lower risk activities and transactions. I’d also like to remind you that there is no benefit to using an unreliable tool, not where data and decisions are concerned. Accuracy matters.

This is a key point. When financial decisions are being made based on a reported dollar value, businesses need to ensure that the evaluation tools being used are producing the most accurate value possible. While this may seem like common sense, this is not the general practice being exercised in the mortgage industry when it comes to AVMs. Hundreds of millions of times each year, lenders and servicers are running AVMs without much thought as to the accuracy of the reported figures, and this haphazard approach is likely costing them more than they imagine.

The following are three of the most common ways that AVMs are being used by lenders and servicers today:

1) Mortgage Pre-qualifications

A lot of smart lenders are using AVMs in the pre-qualification process. As they’re taking a quick, cursory look at borrowers, they’re also taking a quick review of a property, to see if a deal is worth pursuing. AVMs are well-suited for this review. It takes just minutes to run an AVM, and if the right one is used, the results can be surprisingly accurate. However, if the AVM is not accurate, lenders are likely wasting money and missing valuable opportunities.

If an AVM comes in significantly below the property’s actual current value, lenders are missing opportunities in loans that can’t be made. Let’s say your average gross profit per loan is $4,000; even one lost customer a month can amount to nearly $50,000 in missed opportunities per year. If, however, the value comes in too high, lenders can invest valuable man-hours taking a loan through the process until an appraisal reveals that the transaction won’t go. Even at a pay rate of $25 per hour, a processor spending a mere four hours on a loan that will never fund is costing the company $100 on lost labor.

This situation might be understandable if an AVM returns a value of $200,000 and an appraisal comes in at $194,000, and it’s just enough to kill the deal. In cases like these, hopefully the loan officer informs the borrower that the value is tight and may not come in as needed. If, on the other hand, the appraised value comes in at $186,000, and there was clearly no reason to even run a full appraisal, chances are, you’re going to have a very upset borrower on your hands. Incidentally, in case you’re wondering, yes, there is a way to make sure that you have significantly fewer of those $200,000/$186,000 scenarios. That is absolutely within a lender’s control. I’ll get to the details of how later.

The Cost of Losing Trust

Back to the $200,000/$186,00 situation. There’s a more significant, long-term financial issue at hand here. Borrowers traditionally cover the cost of the appraisal, which is roughly $350 for the average non-FHA loan. From what I hear, borrowers don’t take very kindly to paying fees for a loan that has no possibility of being funded. While this is important for any lender to remember, credit unions, being the member-driven organizations that they are, might want to be particularly attuned to this.

There have been numerous studies of the costs of losing trust, and consequently losing a customer who feels he or she has been wronged.  Anecdotal evidence shows that a disgruntled customer will tell between eight and 16 people, with 10 percent telling more than 20. When you factor in the ease of communication and the viral nature of social media, the number increases exponentially. Even if they tell no one, 9 out of 10 unhappy customers will never purchase goods and services from you again. Not a good consequence when, according to Gartner Research, the cost of acquiring a customer is five times the rate of retaining existing ones.

I’ll leave it at that this month. Next month I tell you how else AVMs are commonly used and how they can improve your bottom line.

About The Author

[author_bio]

Phil Huff is CEO at Platinum Data Solutions. Phil is a CEO with a history of growing companies whose technologies revolutionize manual mortgage processes. As co-founder and CEO of eLynx, Phil built the management team, grew recurring revenue to $15 million, and orchestrated the company’s sale to American Capital for $40 million in 2004, five years after the company’s launch.

AVM Secrets And Lies

You can Download this article as a PDF HERE

TME-PHuffThough many people don’t realize it, billions of automated valuation models (AVMs) are used each year to value properties. In fact, AVMs are the most frequently used tool for valuing residential properties. In comparison, roughly 2.5 million traditional appraisals are completed each year. Yet despite their popularity, AVMs still get a bum rap in some quarters. It’s an undeserved reputation, in my opinion. And I’ll tell you why.

Platinum Data is the largest independent reseller of AVMs in the industry. To give you an idea just how substantial the volume of AVMs is industry-wide, consider that one of our vendors reports volume of over one billion AVMs each month. That’s over 12 billion AVMs each year for that vendor alone.  Add that to all of the AVMs from other vendors and you’ll see: this is probably the largest, least talked-about market in the industry.

Just who is using AVMs? I estimate that at the very least, hundreds of millions of the billions of AVMs run each year are performed on behalf of lenders and servicers. The remaining are used by other financial service providers, such as auto lenders and other creditors. In the mortgage industry, AVMs are used to estimate the value of a residential property for everything from home equity lending to pre-qualifications for first trust deeds; from appraisal due diligence to valuing servicing portfolios.

The truth is, AVMs are used so frequently because they work. They’re good at what they do, which is to provide a reasonable estimation of a property’s value, quickly and at a very low price. Yet despite the fact that AVMs are used millions of times every business day, very few in the mortgage industry are discussing them. They’re often treated like the industry’s dirty little secret. But why?

For one thing, there are a number of misconceptions about AVMs. A lot of conclusions about AVMs were drawn at a time when they were being misused as replacements for appraisals in securing a first trust deed. Information on AVMs was presented out of context by organizations that incorrectly believed AVMs might threaten their business. This in turn perpetuated some myths about AVMs. I’m not interested in pointing the finger or figuring out why certain organizations wanted to undermine AVMs. My objective is to shed light on the most relied-upon product in its category, and to uncover how AVMs are being used–or in some cases, misused–so we as an industry can improve, continue recovering, and originate and service healthy loans.

Re-Evaluating AVMs

It’s time to re-evaluate the industry’s position on AVMs. If we don’t acknowledge AVMs as a critical and often-used component of certain mortgage processes and transactions, we are missing an opportunity to optimize them. The more we know about AVMs, the more we can bring them into the conversation, learn about them, improve them and leverage them to further the industry—not to mention improve our bottom lines.

At a time of shrinking volumes and constricting margins, it’s high time for us to separate AVM fact from fiction. Here, I’ll evaluate the five most prevalent AVM myths and get to the truth of the matter.

Myth #1: AVMs Are Unreliable

Several experts, including renowned valuation expert Bill King, Platinum’s senior vice president of valuation solutions, have estimated that AVMs as a whole are likely to have a standard error of about eight percent. That means an AVM will return a value that is within 16 percent of the actual value of a given property, 95 percent of the time. Before we jump to a conclusion on whether or not we can deem eight percent reliable or unreliable, let’s put that percentage into proper perspective. Studies have found traditional appraisals can have a standard error of roughly 13 percent, which means appraisals, on average, are within 26 percent of the actual value of the property, 95 percent of the time. Again, this isn’t to point fingers at one form of valuation or to judge one product as superior over another. Appraisals are considered to be the gold standard in the industry. It’s simply to put that eight percent in context. There are other factors to consider. Let’s take a closer look at how standard error is determined.

A standard error rating is an average. Each AVM and each appraiser will achieve a better rating, like two to three percent, on certain properties, and a worse rating, like 15 to 18 percent (or higher), on others. That’s because each AVM performs better within certain geographies and on certain properties. There’s no such thing as a one-size-fits-all AVM, just as there is no such thing as a one-size-fits-all appraiser. AVMs have a two to three percent sweet spot, just as appraisers do. Regulations mandate that we utilize appraisers with geographic competency. We’re required to use the most suitable appraiser for the property. The question is: why aren’t we required to use the most suitable AVM for a given property, as well?

Myth #2: AVMs Shouldn’t Be Used Because They Cannot Inspect a Property

An AVM cannot conduct a physical inspection of a property. Most in the industry understand this limitation, and regulators have taken it into account when developing AVM usage guidelines. But this doesn’t necessarily mean that the mortgage industry shouldn’t use AVMs. It simply means that AVMs shouldn’t be used exclusively to evaluate collateral in transactions such as first trust deed mortgages, but instead for servicing portfolios, home equity lending, appraisal underwriting and quality control, and prequalifying first trust deeds. It’s a matter of common sense. You’ll want an inspection on higher risk transactions. The risk associated with a brand new, high loan-to-value first trust deed is greater than the risk, for example, on one of 10,000 loans in a servicing portfolio of first mortgages, particularly when those mortgages are secured by collateral that was recently valued with a traditional appraisal.

An AVM’s inability to inspect a property doesn’t impair its ability to perform any of its core functions within the mortgage sector. We simply need to remember where it makes good sense to use an AVM and where it doesn’t.

Myth #3: AVMs Don’t Do a Good Job of Taking Neighborhoods into Account

A lot of people have criticized AVMs, saying they can’t fully characterize, differentiate and account for neighborhoods. While this may have been true in the past, times have changed. The AVM of today isn’t exactly your father’s AVM.

AVM technology has progressed quite a bit since the days when AVMs were severely misused in our industry, when they were used to value collateral for first trust deeds with loan-to-value ratios that exceeded 100 percent. Thanks to the work of the industry’s top minds in valuation analytics, AVM providers are now able to construct more and more meaningful geographical boundaries within their databases. In fact, they’re actually starting to come out with neighborhood-specific and community-specific models. They’re not simply drawing boundaries as a circle or a box. They’re establishing what are called “neighborhood polygons,” which essentially means they’re able to create neighborhoods that have jagged lines and specific boundaries.

While an AVM isn’t a person who’s lived in a neighborhood for the past two decades, it is a technology that can be programmed to learn rules and execute those rules flawlessly, 100 percent of the time. And that technology is improving every day.

Myth #4: AVMs Rely on County Data, and County Data Isn’t Reliable

AVMs do rely on county data. However, in aggregate, county data is generally reliable. A lot of folks who say that county data is unreliable argue for the use of Multiple Listing Service (MLS) data. My issue with using MLS data is that listing agents are working for their clients, not for lenders. That’s not to say that Realtors are dishonest, by any stretch. Realtors are qualified professionals who play an essential role in the housing industry, as well as in the American economy. While Realtors as a whole have zero interest or intention of deceiving lenders, their interests are focused on keeping their clients satisfied. That sometimes means listing homes for as high a marketable price as possible, not necessarily at a price that reflects the true market value of the property.

If Realtors made a habit of marketing properties using the bare bones, hand-to-heart truth, they’d probably be doing their clients an injustice. While they may not hide the ugly truth, they probably aren’t baiting the hook with it, in the same way that Coca-Cola’s ad agency won’t recommend an ad campaign that leads with the number of calories or lack of nutritional content in a can of Coke. It’s going to put Coke’s best foot forward, just as a Realtor will do with the client’s property. You’ll find out about the 140 calories soon enough. The ad agency wants you to know how Coke tastes or how it will make you feel, before you start visualizing those extra pounds. It’s not dishonest. It’s just common sense marketing, and that goes the same for marketing homes.

While there’s no such thing as 100 percent reliable data from the county recorder or any other source, I certainly don’t believe that marketing copy provides a more accurate or complete depiction than historical record. The fact is, county data is pretty darn reliable, and getting more so every year.

Myth #5: AVMs Rely on Outdated Comps

Over the years, I’ve heard it argued that AVMs aren’t credible because they use outdated comparables. It’s an old argument, and one without much merit.

Of course it’s possible that AVMs may sometimes need to rely on dated comps, but then again, so do appraisers. If an AVM doesn’t have access to current comps, neither will any other form of property valuation, and that includes a full appraisal by an appraiser. Everyone is fishing from the same pool. In any given neighborhood at any given time, comps may be abundant and current, or sparse and dated. Just like most appraisers, quality AVMs will not choose outdated comps if relevant, current comps are available. The alternative is to use comparable sales that are outside of an acceptable area, which is, of course, the same challenge faced by appraisers.

It’s certainly not ideal to use dated comps. But in my opinion, it’s even less desirable to use comparable sales outside of the subject neighborhood. However, when these scenarios occur, they are industry-wide challenges that are not unique to AVMs.

AVMs are practical, useful tools when used in the correct situations

The bottom line is that when used correctly, AVMs are viable tools for providing a fast, accurate, and very economical estimation of collateral value. Given the fact that the mortgage industry is using hundreds of millions of AVMs each year, we need to come together and open the lines of communication. Lenders and servicers need to share information on how they are using AVMs. And technology experts need to move forward, innovate, and introduce new tools that will bring positive change into this segment. AVMs aren’t going anywhere. They will continue to impact the industry, whether we acknowledge them or not. If we want to control the impact AVMs have on our industry and on our individual bottom lines, we need to start by acknowledging their use, their prevalence and their role in our operations.

In next month’s installment, I’ll share the information I’ve gathered on how lenders and servicers are using AVMs in the current market, provide concrete specifics on how big an impact AVMs are having on the bottom lines of lenders and servicers, and list specific steps that lenders and servicers can take to save tens and hundreds of thousands of dollars—perhaps even millions of dollars—simply by choosing and using the right AVM for the scenario.

About The Author

[author_bio]

Phil Huff is CEO at Platinum Data Solutions. Phil is a CEO with a history of growing companies whose technologies revolutionize manual mortgage processes. As co-founder and CEO of eLynx, Phil built the management team, grew recurring revenue to $15 million, and orchestrated the company’s sale to American Capital for $40 million in 2004, five years after the company’s launch.

Put Your AVMs To The Test

Platinum Data Solutions has completed accuracy testing and calibration for each of the18 non-proprietary automated valuation models (AVMs) available through its OptiVal platform. This calibration program is part of a major upgrade to OptiVal, an automated AVM analysis technology that enables lenders and servicers to develop the optimal AVM cascade based on user-defined risk parameters, in just minutes. The calibration program is part of Platinum’s plan for consistent improvements to its zero-tolerance solutions for appraisal and mortgage data quality.

Millions of AVMs are used each year to value collateral for home equity lending, quality control, and portfolio analyses, as well as during the prequalification process for first mortgages. One of the biggest issues lenders and servicers face with AVMs is finding the most suitable model for a particular lending scenario or loan file. This is because no single AVM is suitable for every situation, and evaluating AVM performance requires data and analytics resources that can be expensive, if not unavailable.

“The number of AVMs being used has grown by leaps and bounds, especially over the last five years,” said Joni Pilgrim, co-founder of Nationwide Appraisal Network, a nationwide appraisal management company and Platinum Data customer. “The issue is, AVM accuracy can vary widely, depending on factors like intended use, property location, and individual property characteristics. Lenders, servicers and investors need to choose the right AVM for the task, because the wrong AVM can diminish quality. At Nationwide Appraisal Network, our biggest differentiator is our quality and compliance program. We take AVM suitability seriously because our clients rely on us to do everything we can to assure quality and compliance.”

OptiVal is a SaaS (Software as a Service) platform that automates AVM performance assessments, yielding results in just minutes rather than the days or weeks required to analyze AVMs manually. It utilizes Platinum Data’s proprietary benchmark data as well as user-defined criteria in its analysis, resulting in AVM cascades that are tailored for specific uses, whether for equity lending, prequalification, quality control or virtually any other application. With OptiVal, lenders and servicers are no longer confined to using a one-size-fits-all approach to building AVM cascades.

Once the cascades are built, users can order the AVMs from any AVM provider in just moments, directly through Platinum Data.

“The industry relies on AVMs a lot more than most people realize,” said Phil Huff, CEO of Platinum Data Solutions. “And AVM accuracy directly impacts the bottom line. Inaccurate AVMs easily cost lenders and servicers millions of dollars annually in lost liquidity, lost sales, and additional labor costs. OptiVal provides our customers with a smarter choice for selecting the right AVM.”

Progress In Lending
The Place For Thought Leaders And Visionaries

Measuring AVM Accuracy

*Measuring AVM Accuracy*
**New Reseller Emerges**

***Are AVMs accurate? When should you use them? New developments are making AVMs a more valuable tool each and every day. For example, Veros has added the Realtors Valuation Model (RVM) to its platform of solutions for the mortgage and investor market. RVM is the product of Realtors Property Resource, LLC (RPR), a wholly owned subsidiary of the National Association of REALTORS, and Lender Processing Services, Inc. (LPS).

****“The AVM marketplace continues to introduce high-performance models,” says David Rasmussen, Veros’ senior vice president of operations. “These models are particularly important as the most recent update to the Interagency Appraisal & Evaluation Guidelines highlighted the need for thorough testing of all valuation methods of all varieties. Utilizing multiple AVMs according to performance is an efficient and effective approach to valuation. RVM is another high-performing model to add to our impressive list of available AVMs.”

****Tricia McClung, RPR Vice President of Business Development, states, “The Realtors Valuation Model was created to assist the housing market – from REALTORS to investors – with improved analytics that enhance how properties are priced and evaluated. RVM leverages a broad array of property information, including REALTOR market data, for a comprehensive, current, and reliable valuation result.”

****Veros will market RVM to its client base as a standalone product as well as through its valuation management platforms: VeroSELECT and Sapphire.

Progress In Lending
The Place For Thought Leaders And Visionaries

Tracking The Rental Market

*Tracking The Rental Market*
**By Tony Garritano**

***As more people move away from owning a home in favor of renting a home, information on rentals is in demand. The fact is that people are also being forced to rent. If your house is foreclosed on you are probably going to be a renter very soon. On a similar note, mortgage lenders and investors are increasingly becoming landlords as a result of mass foreclosures. So, everyone in our space needs good rental data. To this end, a company called RentRange has developed a tool to zero in and optimize rent estimates by property; pre-fill or supplement traditional AVMs, BPOs and appraisals; determine sell/rent/hold strategies and more. Here’s what they offer:

****This automated valuation solution by RentRange provides key information about localized vacancy rates, rental market strength indicators and more vital intelligence. Specifically, RentRange, LLC is a provider of single-family rental market intelligence to the financial services and real estate industries. With a core focus on national residential rental data, analytics, and valuation solutions, RentRange delivers a wide assortment of address and geography-level knowledge and rental AVM technologies designed to fit the demands of any sized organization.

****The company offers geography-driven regional data on rental properties, both single family and multifamily apartment/condo/townhome residences. Macro data is available at MSA, city and zip code levels in a variety of formats designed to provide vital decision-making information at top speed. RentRange also offers address-level rental property AVM (automated valuation model) with confidence score, neighborhood rent averages and trends, area vacancy rates and rental market strength indicators.

****I’ll be sure to keep you updated on RentRange and others looking to help the space become more educated about how to deal with rentals.

Tony Garritano
Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at tony@progressinlending.com.