Method used for valuation of house is important

Nation's Housing

May 09, 2004|By KENNETH HARNEY

WHEN YOU buy a house, does it really matter what type of valuation method is used by the lender? Does it matter whether your lender uses a live appraiser, an online property value database or a "drive-by"?

You bet it does, especially now. Lenders nationwide have just been warned that when they use anything less than a full, traditional appraisal in housing markets where values are weak, they could be penalized on Wall Street.

Fitch Ratings, one of the major risk-assessment firms for the global bond market, says anything less than what it calls "the full monty" - an on-site, exterior and interior professional appraisal - is likely to overstate the worth of the property if it's in any of dozens of slowly appreciating markets around the country.

Fitch plans to impose a 10 percent to 15 percent "haircut," or devaluation, on the homes backing mortgages in bond pools if they are in weak real estate markets and did not receive traditional full appraisals.

That rules out the quicker and less-costly valuation alternatives that are in wide use, including online database "automated valuation models" (AVMs), broker price opinions (BPOs), desk reviews, tax assessments and drive-bys.

Bond investors - those who buy into the giant mortgage pools that finance much of the American home loan market - care deeply about accurate property valuations. That's because when borrowers default and go into foreclosure, investors take heavier losses when the appraisal used by the lender inflated the property's value.

Under Fitch's new policy, a home valued in Denver at $300,000 by an AVM could be treated as having a true market value - for bond market purposes - of $255,000. A $1 million house in San Francisco or San Jose, Calif., could be devalued by $100,000 to $150,000.

About two dozen major markets are rated "soft" or "weak" by Fitch, but others could be added to the list in the months ahead as interest rates rise and appreciation slows.

The impact of the policy change on individual consumers is likely to come from moves by some lenders to avoid valuation methods that could trigger the "haircut." For some homebuyers, that could mean paying $350 to $500 for a traditional appraisal rather than $50 to $100 for an alternative valuation. It could also mean a longer wait between loan application to closing.

Fitch's senior director for residential mortgage-backed securities, Sarbashis Ghosh, said the policy change is a response to the surging popularity of alternative valuation techniques among lenders. AVMs, in particular, are much faster and cheaper than full appraisals, and allow lenders to respond to borrowers' demands for speedy closings.

Yet Fitch's research in soft and declining markets suggests that automated valuation techniques aren't as good as live appraisers in pinpointing values in areas where appreciation rates are slowing down. Appraisers "visit the property and observe its condition, and the condition of the neighborhood," said Ghosh. Automated valuation models depend on public records of closed sales "and inevitably lag" behind price changes.

Traditional appraisers are cheering Fitch's new policy. "It's about time," said Frank Gregoire, chairman of Florida's state appraisal board and a St. Petersburg-based real estate appraiser. "The pendulum had swung too far," allowing lenders to ignore trained professionals in favor of computer models, he said.

An AVM "can't pick up all sorts of specific situations that affect a home's value," said Gregoire. It can't detect seller contributions that push up selling prices, "a $200,000 house selling for $212,000 because the seller is paying $10,000 of the buyer's closing costs," he said.

John Ross, executive vice president of the Appraisal Institute, the largest professional organization representing appraisers, said Fitch's decision amounts to "a reaffirmation of the role of the appraiser with local market knowledge."

Companies that develop and sell automated valuations to lenders are less enthusiastic about Fitch's change.

"I think it's overblown," said Terry Loebs, vice president of Case Shiller Weiss, a realty data company that assembles data on property value changes nationwide and markets the popular AVM called CASA. "There is no evidence that AVMs overvalue" properties in weak markets, he added.

Nevertheless, look for a renewed emphasis on old-fashioned, on-site appraisals in many parts of the country. If the bond investors who put up the money for your mortgage want a live appraiser to visit the house you're buying, they'll probably get their way.

Ken Harney's e-mail address is

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