Appraisal Buzzworthy Interview

 

Buzz: The word is you have recently established your own consulting business. What market are you serving?

Kennedy: Yes I have recently started a company called AVMetrics which is descended from a startup that I was part of after leaving Washington Mutual Bank in 2004. The AVM consulting is a small but important part of my business. I think of it more in the terms of educating or training the users of AVMs and other evaluation products when (and when not to) and how to use them in a regulatory compliant and effective way. However, the main focus of my new business is to bring truly independent testing and analysis of AVMs to the lending community.

Buzz: Are there geographic advantages of one AVM over another?

Kennedy: The short answer here is absolutely. Not to add layers of complexity but we find that there are substantial accuracy differentials on how well AVMs in general and specifically which AVMs perform well, or not, from a National to State to MSA to the County levels. Some of the granularity that we test at AVMetrics is below the County level. We test accuracy levels by market price segmentation (entry, move up and high end markets) and by housing type within those segmentation levels (SFR detached, attached, Condo and PUD). This gives the AVM user a much clearer picture of AVM accuracy on which to base their business and ultimately their risk decisions.

Buzz: Appraisers claim their work is more accurate than AVMs. Is the answer to that question obtainable?

Kennedy: That is a tricky question at best. Please understand that I am an appraiser (so is my wife) and I have some biases because of my many years in the appraisal business. Can an appraiser be more accurate in valuing a property than an AVM? Yes! Are ALL appraisers/appraisals more accurate in valuing a property than an AVM? No! In the appraisers favor for accuracy is local market knowledge including location factors, market driven variables, localized data sources and in house files to name a few. NOT in the appraisers favor is “lender” pressures for a targeted value, faster turn times as well as geographic, data or other competency issues. In the many studies that I have participated in, AVM accuracy when compared to appraisal accuracy is not counter intuitive. AVMs tend to be more accurate in conforming (Homogeneous) non complex residential tracts with good public record data available to the model. You could draw the correlation that these noncomplex types of appraisals are being preformed by those appraisers with the least experience and, due to the conformity of the market that values that are being “pushed” by an appraisal are much easier to identify. Conversely, the accuracy of AVMs diminishes when complex valuation issues come into play. There are several “White papers” on appraisal accuracy with the most notable being a study that was done back in the mid 1980’s by Dotzour. It was published along with several other studies in 1988 in “The Journal of Real Estate Research” and makes for some interesting reading if you are a geek like me.

Buzz: What do you think about “appraiser assisted” valuation models?

Kennedy: As you know the evaluation products that utilize an AVM or the data outputs from an AVM go by many different names and are in the early adoption stages by lenders. At Washington Mutual Bank we referred to these types of evaluation tools as GAP products. Here is an example of why the lenders are looking to fill what they perceive as a GAP in their “bump Logic” or escalation of evaluation service level processes.

A property/borrow qualifies for an AVM service level by virtue of many factors such as loan type (Home Equity, Refinance 1st mortgage etc..) and the broad qualification categories of Credit (FICO score), Collateral (Loan to value ratio) and Capacity (to repay the loan or debt ratios). If all three of these are “Wonderful” lets say FICO >720, minimal debt combined with adequate income and what looks like a Combined Loan to Value ratio (CLTV) that is relatively low say under 80% based on the owners estimate of value (OEV) then this transaction qualifies for an AVM. However, when the AVM is run and comes back with a lower or higher than expected value based on the OEV or other disqualification factors then it can not be used and the next level of evaluation service is ordered. In the past this was a desktop or 2055 driveby. These types of evaluations are much more time consuming for the lender and relatively expensive when compared to the cost of an AVM. Cost is a factor as lenders, especially in the equity lending arena “eat” the costs associated with making these loans including the collateral evaluation cost. This is good for you and me as consumers. However, for the lender to keep the internal cost of producing these loans low and to keep the time frames for funding short an evaluation “GAP” product was needed, consequently the development of an assisted AVM product.

I’m going to get on my soap box for just one minute. Appraisers need to adopt these new types of valuation products into their “Toolbox” so that they can continue to service the needs of their clients and retain their well earned position in the industry as the collateral experts. Get the training that you need to use these new tools in a competent manner and let your clients know that you are ready, willing and able to meet their collateral valuation needs. Ok I’m back off of my soapbox for now.

Buzz: How would an appraiser proceed with getting involved with AAVMs?

Kennedy: First appraisers must be trained in understanding AVMs. Obviously I would recommend the “AVM Fundamentals” seminar in San Antonio. I would also recommend participation in the “AVM360” discussion group hosted by Appraisal Buzz. There are some exciting things happening in this space and appraisers can help shape the way these evaluation products are being developed. Currently the majority of products that exist are lender based products. However, when lenders, AVM vendors, software developers and appraisers all start talking to each other there will be the potential for some exciting new products and opportunities are bound to emerge.

Buzz: Appraisers have been told that AVM vendors and data aggregators are stealing their data. What is the real story on the data that fuels AVMs?

Kennedy: I too have heard those rumors. I do not know of any AVMs that are currently using appraisal data to fuel their AVMs. For technical data integration issues alone this would be a daunting task to do with any type of scale. It is true that appraisal data is being captured and stored by many of the large and midsized lenders through their transactional platforms and through the use of .PDF decompiling and OCR technology. The big advantage of doing this is to apply automated consistency checks and rules based compliance “Review” processes. The main source(s) of data that fuel the AVMs are Public Record data purchased, cleaned and standardized by the Big three data repository’s First American, Fidelity and DataQuick.

Buzz: Do appraisers need to worry that AVMs will replace appraisers?

Kennedy: This is what I told my appraisal staff when I was an appraisal manager at Washington Mutual Bank. “If you are only a form filler you better go find another line of work”. “However, if you are a collateral analyst an can solve the complex issues that effect value then there will always be a place for you in the valuation of real estate”.

OK, back on my soap box one more time.
Appraisers take the time to invest in yourself and your business first of all by taking quality educational offerings and second by mixing with your peers when possible at local, regional and national events. What you will learn will not only surprise you but will make you a better appraiser and a more accomplished business person.

Buzz: It would appear that many large lenders are active in AVM usage. How do lenders who are not so well versed get started?

Kennedy: Call me!! No really call me!! It’s not just the large lenders that have adopted the use of these evaluation tools into their lending process and as many are now realizing they have in essence put the cart before the horse. The regulatory agencies and more frequently now investors, MI companies and rating agencies are requiring that these institutions have a good understanding of how these products work and how they affect the risk equation not only at the transactional level but also the “Overall” collateral risk of the lending institution. The use of these evaluation products also has a direct impact on the implementation of SOX, RAROC and the upcoming Basel II accords from an Enterprise Risk level perspective.

In answer to your question on how do users of AVM products get started besides calling me.. well the OCC has issued several bulletins over the years that pertain to the use of AVMs. Without going into detail on each of these “guidance” bulletins they are OCC 2000-16, OCC 2004-59 and the most recent issuance OCC 2005-22. Each of these bulletins can be found on the OCC’s web site and will refer you to other pertinent documents. I also have links on my web site to these and other related material at www.avmetrics.net

Buzz: Thanks Lee. See you in San Antonio at Valuation 2006.